1H Coal Production Up 2.7%.

Coal mining companies extracted 39.8m mt of coal in 1H06, up 2.7% yoy. All the growth was in steam coal: its extraction was up 10.8% yoy due to the cold winter and increased use coal over gas in the fuel mixes of thermal power plants. Coking coal extraction dropped by 7.7% yoy to 24.3m mt due to lax demand from coke makers. Eugene Cherviachenko: We expect demand for steam coal to grow by 4%-5% annually over the mid-term and demand for coking coal to stabilize. In the longer term we expect growth in demand for steam coal to accelerate as thermal power plants almost completely eliminate use of gas, while steel mills will switch from gas to pulverized coal injection (PCI). We also expect privately owned, vertically integrated coking coal producers to increasingly dominate their market: in 5M06 they increased their output by 5% yoy, while state-owned and non-integrated private producers reduced output by 19% and 10%