DTEK, miners demand increase of domestic coal prices

Pavlogradvuhillia, the biggest mine in Ukraine belonging to DTEK (DTEKUA) may decrease coal production by as much as 5 mmt (26% yoy) in 2015 if power sector regulators do not increase coal prices, the holding’s CEO Maxym Tymchenko stated on Apr. 21, as sited by Interfax-Ukraine. According to Tymchenko, Ukraine’s government has declined to agree on a price of UAH 1,500/t for Ukrainian (DTEK’s) coal. The government insists instead on the price of UAH 1,100/t.

Pavlogradvuhillia produced 18.9 mmt of coal in 2014, which was 50% of DTEK’s coal mining and almost 30% of Ukraine’s total mining. In 1Q15, the mine’s share reached nearly 50% of Ukraine’s total coal output.

About 2,000 miners from different regions of Ukraine organized protest meetings in Kyiv on April 22 demanding the dismissal of the Energy Minister as well as an increase in coal prices. According to media reports, many of the miners were employees of DTEK enterprises.

Alexander Paraschiy: The reason for the conflict between DTEK and the government is that the holding is willing to see a much higher tariff for electricity produced by its thermal power plants. The power tariff is a function of coal prices, and DTEK cannot agree with the government on the level of that coal price. This is because there is no market price for coal in Ukraine as DTEK is both biggest producer and biggest consumer of coal. The government assumes that UAH 1,100/t is a good price assumption for DTEK’s coal, as it covers its production costs. DTEK’s arguments in favor of the UAH 1,500/t coal price are that the price of alternative, imported coal, is even higher.

We doubt that there are any economic reasons for DTEK to decrease coal mining at Pavlogradvuhillia, but we do not rule out that the holding will do just that to force the government to review its attitude toward pricing of power produced at coal-fired stations. The key problem here is that such arguments as decrease of coal mining will start working closer to autumn (when demand for power and coal increases sharply and there is a risk of a power deficit). DTEK is apparently not willing to wait so long. We believe that the miner’s protests, as well as other types of pressure on the government from DTEK, may intensify in the coming weeks.

That said, we see a high risk that the next couple of months could be hard for DTEK’s. Howerver, for sure, the situation will change for the better, in terms of power tariffs, closer to autumn.