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Kyiv Post: Ukraine relies on South African coal to stay warm during winter

With a coal shortage of 5.6 million tons looming this winter, Ukraine is scrambling to make up this deficit from whatever source it can easily access.

© Kyiv Post

The nation’s electricity and heat generating companies are heavily dependent on coal for fuel, but the war that erupted in the main Donets coal basin in March has caused extraction of the highly thermal types A and T coal to decline by a critical 13 percent in nine months.

Coal is a source of 42 percent of the electricity that Ukraine makes. DTEK, Rinat Akhmetov’s energy holding which produces a third of the nation’s electricity, said on Oct. 10 that the nation is short of 8.5 million tons of coal in November-March.

As black fuel reserves declined through the summer, the government and private companies began to search for new sources. On Sept. 23, Energy Minister Yuriy Prodan said that for the autumn-winter period Ukraine will need to import 5.6 million tons of coal to cover the deficit. Total consumption is pegged at 19 million tons.

One such contract to buy coal from abroad was signed on Aug. 19 between Ukrinterenergo, a state-run company in charge of international energy deals, and London-registered Steel Mont Trading Ltd to supply the power generation company Centrenergo with 1 million tons of anthracite from South Africa. The first 85,000 tons arrived at Ukraine’s Pivdenniy port on Oct. 21, a shipment of 79,000 tons should come on Oct. 28-30, and the third of 85,000 tons should arrive by Nov. 7-9.

Steel Mont deals with steel, ferroalloys, building materials, agricultural products, and coal. The company has offices in Ukraine, United Arab Emirates, India, Germany, Turkey, and Russia. Its owner Rajesh Saraiya was educated in Ukraine and is the founder of the Sanskriti Indian cultural center in Kyiv.

While neither Ukrinterenergo nor Steel Mont would disclose the price of the deal, Energy Minister Prodan said that it is worth more than $90 million at $91 per ton, excluding value-added tax. This is considerably above the current spot price for South African coal of around $70 per ton for November delivery, according to Index Mundi, a market data website.

Recently, South African coal prices sank, according to coal industry analyst Xavier Prevost of XMP Consultancy, part of a global trend over the industry’s coal glut.

Andriy Chubyk, an analyst with XXI Strategy energy think tank, says that overall the Steel Mont deal is not bad for Ukraine. It was framed so that Steel Mont covers transportation expenses and all the duties. However, Ukrinterenergo has to pay Steel Mont a premium over the initial price for the coal on the South African market.

Neither Ukrinterenergo nor Steel Mont representatives were available for comment.

At first glance, the deal looks suspicious because of the price. To compare, in early September power generating company Donbasenergo, which operates in eastern Ukraine, started importing Russian coal for $80 per ton, according to Liga, a news and analysis website. Meanwhile, DTEK announced on Sept. 12 that it would source Russian coal via neighboring Rostov Oblast for $70-75 per ton, to be shipped by rail.

"Factoring in clearance and transport costs within Ukraine," explains Case Ukraine research group's analyst Yevhen Dubogryz, "the final tally should come to $80-85 per ton." Prodan said on Oct. 8 that private companies will buy 4 million tons of Russian coal by the end of the year.

Ukrainian energy generating companies face shortages of anthracite, a high quality coal, of around one million tons a month, and imports via seaports could cover only around 400,000 tons a month, according to DTEK director general Maksym Tymchenko. "Russian coal is the most realistic option, and it is some $20 per ton cheaper than coal shipped via ports," he concluded.

DTEK sells anthracite coal on the domestic market for $110 per ton, while production costs at state-owned Ukrainian mines are an average $115 per ton, says Dubogryz of Case Ukraine.

Ukraine's largest coal mine Komsomolets Donbasu, owned by Rinet Akhmetov's energy holding DTEK, was devasted by artillery fire on Oct. 13. The mine supplied coal to several thermal electric power stations.

Ukraine’s thermal electric power stations consume 3.2 million tons of coal per month, according to Concorde Capital analyst Roman Topolyuk, while Ukraine will be able to extract no more than 10 million tons during the heating season, adds Dubogryz.

The reluctance to buy coal from Russia can be explained by the government’s policy of not buying from Russia if possible, the lack of reliability of sourcing energy supplies from Russia, considering the current gas conflict, and the fact that transport links pass through or near the warzone, says Chubyk of XXI Strategy.

However, the Ukrainian government has to make sure it has alternative sources of coal since Russian supplies are at high risk, the analyst told the Kyiv Post. Meanwhile, negotiations to buy thermal coal from Poland, as an alternative, have gone nowhere.

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