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AUG 2016

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42 www.coalage.com August 2016 eastern europe Eastern European Coal Report by vladislav vorotnikov The first half of 2016 has not gone well for the largest coal producers in eastern Eu- rope: Ukraine's DTEK, Poland's Kompania Weglowa and the Czech Republic's OKD. Each are leading coal producers in their re- spective countries, and they are all facing financial difficulties as production costs exceed current market prices. All of these coal operators are urging authorities to ex- pand subsidies until prices move higher to avoid bankruptcy and a further collapse of this industrial segment. Ultimately, however, it turns out that each country has its own attitude toward the future for coal producers. The Czech Republic, which relies on brown coal pro- duction for power generation, will not support OKD's metallurgical coal mines. Poland has reorganized again, but this time it will have to make tough choices or it will simply end up in the same position in two years and further in debt. With the war and the new Russian republics, the sit- uation in Ukraine remains uncertain. The country hopes to avoid buying coal or gas from Russia, yet it has had to buy coal from rebel-held mines to avoid an energy crisis. What is clear is that coal production at some of the deeper operations will end soon. The bigger question is whether the countries are prepared for the loss in gross domestic production (GDP) and the socioeconomic impact of the loss of jobs. And then there are the legacy issues, such as retired miners and environmental cleanup that will also have to be addressed. Ukraine Imports Coal for the First Time The largest coal producer in Ukraine is DTEK and it has six subsidiaries: Pavlogradugol (10 mines), Dobropolyeugol (five mines), Roven- kianthracite (six mines), Sverdlovanthracite (five mines), Komosomolets Donbassa (one mine) and ALC Bilozerska (one mine). The company also operates 12 prep plants. Last year, DTEK experienced a 90% in- crease in losses compared to 2014 to $1.4 billion. In response, the Fitch agency has lowered the company's rating from CCC to C, indicating significant problems and creating quite a bit of speculation on possible bank- ruptcy. Despite huge losses, DTEK execu- tives have close ties to Ukraine's government, which they hope will improve situation. Ukraine's government has initiated a painful reform for the coal industry, with the goal of not only cutting its losses relat- ed to DTEK, but also for coal equipment manufacturers by ending subsidies. Today, Ukraine spends UAH 13 billion ($520 mil- lion) annually to support coal mining op- erations and a new plan put forward by the country's ministry of energy and coal calls to significantly cut this figure by 2020. According to former Energy Minister Vladimir Demchishin, subsidies previ- ously allowed Ukraine to maintain one of Europe's lowest energy tariffs. In May, new Minister Igor Nasalik said he believed pric- es for coal would rise in the coming years, but offered no figures to support this view. With the rise of energy tariffs by nearly 60% since the beginning of the crisis, some experts said Ukraine should set the mini- mum price for coal at UAH 2,000 per metric ton (or $78/mt), increasing it nearly 30% compared to the current level. By 2020, the price could be raised to UAH 2,500/mt ($98/ mt), decreasing the share of loss-making mines in the country from nearly 65% to only 5%-10%. DTEK, in particular, would post significant profits in this scenario. Since 2013, Ukraine has lost its posi- tion as a net coal exporter with production falling from 86 million mt in 2012 to less than 40 million mt in 2015. For the first time in its history, Ukraine imported coal, spending almost $1 billion to avoid an en- ergy crisis. New reform seems to be part of an en- ergy-independence doctrine of Ukraine President Petro Poroshenko who wants to avoid purchasing gas and coal from Rus- sia or at least cut it to its lowest possible level. The country's government lacks the available funds and, with its obligations to the International Monetary Funds (IMF), it could no longer support the coal industry as it has for the last two decades. The new reforms also include large- scale privatization. Of the 35 operating state- owned mines, the country's Ministry of En- ergy and Coal is going to sell 15 and close 11. During the first quarter of 2016, Ukrainian coal production rose 12.6% to 10 million mt over the same period last year. Of this figure, 7.2 million mt were produced by DTEK. During 2015, Ukraine's total coal production dropped 54.3% to 29.7 million mt, following a 22% drop in 2014 to 65 million mt. This year, Ukraine could produce as much as 41 million mt of coal, which would almost meet its domes- tic demand. Miners check for gas at the Dolzhanskaya-Kapitalnaya mine in Ukraine. (Photo courtesy of DTEK, 2014) Miners check for gas at the Dolzhanskaya-Kapitalnaya mine in Ukraine. (Photo courtesy of DTEK, 2014) Low prices take a toll, while governments deal with socioeconomic issues

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