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BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, NOVEMBER 10, 2010 Resources India's coal consumption may reach 2 billion tonnes by 2030; Russian coking coal a favourite among BRIC countries


NMDC angles for Siberia coal deal, blazes a new trail


With a yawning supply- demand gap, Indian companies are looking afresh at Russian coal assets as a potential gold mine.


NATALYA FEDOTOVA RIBR


Two years ago, the world's largest steel producer Arce- lorMittal, owned by Laksh- mi Mittal, a UK-based Indi- an, acquired three coal mines and associated assets in the Kuznetsk Basin from Rus- sian steel giant Severstal. In 2009, the Russian mines of ArcelorMittal, which be- came the fi rst foreign com- pany to enter the Russian coal market through acqui- sitions, produced 1.9 million tonnes of coal. The $720 mil- lion deal and the success of ArcelorMittal has ignited a renewed Indian interest in the Russian coal industry. The relatively high economic growth rate in India despite the global crisis and the ex- panding demand for infra- structure and power genera- tion has ensured an insatiable demand for coal. But coal output has not kept the pace, creating a supply-demand gap of about 60 million tonnes per annum. Experts believe that in the next fi ve years, there will be an “explosive growth” in In- dian coal imports. Due to the


demand from power sta- tions, metallurgical and ce- ment plants, coal consump- tion in India may reach two billion tonnes by 2030, says India’s Coal Minister Srip- rakash Jaiswal. Currently, India extracts 530 million tonnes and imports approximately 67 million tonnes of coal. According to Jaiswal, the national coal re- serves are estimated at 277 billion tonnes. Coal accounts for 53% of the energy capac- ity; and the government be- lieves that coal will remain the country’s main source of energy in the future despite ambitious plans for nuclear power generation in which Russia is also a partner. With such a yawning sup- ply-demand gap, Indian companies are looking afresh at Russia’s seemingly inexhaustible coal deposits. NMDC, India’s largest iron ore producer, is due to make a proposal to acquire Kol- mar, a Yakutia-based coal mining company owned by Russian billionaire Mikhail Prokhorov’s Intergeo by De- cember 1, Kommersant newspaper reported. Maxim Finsky, general director of Intergeo, told the newspa- per that the company is ex- pecting to receive “at least $400 million”. Interest in the assets was earlier confi rmed


by NMDC’s fi nance director Swaminathan Thiagara- jan. Kolmar comprises several operating coal mines and mines under development, including Erel strip mine with an annual capacity of 450,000 tonnes, Dezhnevs- kaya mine (under develop- ment), Yakutskie Ugli – Novye Tekhnologii (licenses for two plots) and Neryun- griugol, which owns the Denisovskaya mine (esti- mated capacity: 750,000


Billionaire Mikhail Prokhorov's Intergeo is expecting at least $400 mn; deal may be finalised by Dec 1


tonnes per annum). In 2005, Evraz Group, along with its Japanese partner Mitsui, at- tempted to develop Denis- ovskaya, but the joint ven- ture broke up in 2007 because of coal accessibility issues. Kolmar’s total re- serves amount to 400 million tonnes of coking coals of K, Zh and GZh grades. Intergeo bought Kolmar in April. The estimated value of the deal was $300 million. If the deal with NMDC falls through, Intergeo will con- tinue developing the compa-


ny on its own, Finsky said. He added that in this scenar- io, Kolmar would announce an IPO and use the stock market to attract partners, with whom a preliminary agreement has been struck. The company plans to in- crease its coal output to 6.5 million tonnes in 2013. Den- isovskaya mine will be up and running next year at full capacity. Vostochny will start producing coal, and Inaglin- skaya mine will come on line with 2.8m tonnes in capaci- ty. If Intergeo fi xed the Kolmar price early this year when coal cost $180–190 per ton, now is the right time to sell, because coal prices have gone up by 23%, says Niko- lai Sosnovsky, an Uralsib analyst. Boris Krasnozhen- ov of Renaissance Capital believes that at $400 million, it would be an easy sell, i.e. $1 per ton of reserves is a reasonable price. The price tag could be even higher, Sosnovsky says, because In- dian metallurgists lacking sufficient coal supply might offer a good premium for the mines. Even if Kolmar does not sell, it is unlikely that it will be a deadweight on Intergeo’s balance sheet. Under the best case scenario, coking coal prices will grow by 20–


Coal industry: Fact File


Coal accounts for upto 80% of the world’s fossil fuels, while oil and gas make up no more than 17%. In the world’s leading economies, coal gen- erates 60% - 95% of each country’s overall energy us- age. Russia is the fifth larg- est coal producer after China, the United States, India and Australia. Russia has recently


25% next year compared to the average 2010 price, says Krasnozhenov. Steel pro- ducers directly or indirectly control over 60% of coking coal production. Mechel is one of the main players in the segment, with a quarter of the market. Evraz, controlled by Chelsea Football Club owner Roman Abramovich, and steel giant Severstal, owned by Sergei Mordashev share another 10% of the market. There are two segments in


reached an annual output lev- el of 350m tonnes, or 12% of global output. Kuznetsk Ba- sin (Kemerovo Region, Sibe- ria) is the biggest coal suppli- er. Overall, there are 96 coal mines and 148 strip mines in operation. The industry em- ploys 200,000 people. Russia exports coal to 45 countries around the world.


the Russian coal market: coking and power-generat- ing coals. Russian coking coal is a favourite among the BRIC countries, because the markets of three out of four members (Brazil, China and India) have a structural defi - cit due to a lack of hard cok- ing coal. Coal accounts for only 20% of Russia's energy. In the US, the share of coal in electric- ity generation is 50%, in China it is more than 70%. More than 50% of Russia’s


energy demands are covered by natural gas. Russia, how- ever, has already set about increasing the share of coal in its energy mix. According to the Russian energy sector development programme, the share of coal in power generation may hit 40% by 2015. Self-sufficiency is the Rus- sian coal market’s idiosyn- crasy, setting it apart from the other BRIC economies. Russian coal demand is com- pletely satisfi ed by domestic production. Moreover, Rus- sia supplies coal to 45 differ- ent countries of the world. China and India, for exam- ple, import coal mostly from Australia and South Africa under long-term contracts, with the price reviewed on an annual basis, says TKB Capital analyst Evgeny Ry-


abkov. The Russian market is characterised by more fl ex- ible pricing and frequent changes that sometimes cre- ate tension as consumers be- lieve that coal is overpriced. In past few months, coal prices in Russia are steadily rising: since September, they have gone up by almost 80%. The key factor in the upward trend has been the recent re- covery of the global economy and the consequent demand growth in the metallurgical industry in the world, in- cluding in Russia. At the mo- ment, supplying coal for do- mestic consumption is even more attractive for produc- ers than exporting it, be- cause coal has lost almost 20% of its value in the global market over the past few months.


Trade With support from government agencies, Indian leather manufacturers are upbeat, export 387,000 pairs of shoes to Russia in first half of 2010 Polishing a comeback strategy in familiar turf


Indian leather exporters, who once shone brightly in the Soviet market, are now crafting a strategy to recover their lost position.


SVETLANA SOROKINA RIBR


In good old Soviet days, Indi- an leather goods shone bright- ly in the Russian market. In the late 1980s, the USSR ac- counted for about 20% of In- dian leather and leather goods exports, but over the years, China has emerged as the leading exporter of shoes to Russia. Over the first six months of this year, shoe ex- ports from China to Russia through the Manzhouli bor- der crossing checkpoint hit a record high of 1.23 million pairs of shoes, which is 46.6% up year on year. But Indian leather exporters have not been sitting idle. They are determined to re- cover their lost position in the Russian market. In the liberalising 21st century, the Indian government is pro- moting leather exports through a slew of initiatives including the implementa- tion of simplified customs procedures and allocation of funds to manufacturers to help streamline technology. The manufacturers are also being encouraged to mod- ernise industrial facilities to develop the infrastructure and ensure environmental safety of manufacturing.


Indian leather manufacturers are determined to recover their lost positions in Russia.


The Council for Leather Ex- ports, supported by the Indi- an commerce ministry, has thrown its weight fully be- hind this mission by provid- ing support to companies, which are seeking partners in the Russian market or looking to organise their own distribution business in Russia. Presently, Germany, Great Britain and Italy are the principal markets for Indian leather manufacturers. Ex-


port of leather and leather goods to Russia accounts for less than 1% of Russian im- ports or approximately $20 million, a meager amount given that Russia is the 11th biggest importer of leather and leather goods in the world. Russia imported leather goods worth $3,296 million in 2008. The growth rates of leather imports are also impressive - 68% annu- ally before the crisis. The trends in the Russian


market have been encourag- ing. Russian manufacturers have less than 15% of the shoe market, but the busi- ness is changing for the bet- ter. Over the first eight months of 2010, leather and shoe manufacturing grew by 10.9% and 23.4%, respec- tively. India, however, has three in- teresting offers that will fi nd a ready market in Russia, feels the Russian Union of Leather and Shoe Manufac-


turers. Says Nelli Myakuno- va, president of the union: “Russian trade fi rms supply leather to Russia from India. This leather, called yuft (Rus- sian leather), is used to man- ufacture special and work shoes. Indian leather is much cheaper than Russian and only an eighth of the price of leather imported into Russia from other countries.” Ac- cording to the union, Russia imported 893 metric tonnes of Indian leather for only $900,000 in the fi rst quarter of 2010. This is not much. Clearly, there is enormous growth potential. Second, there are supplies of shoe uppers. Deliveries of shoe uppers are already under way and can gradual- ly increase. The customs sta- tistics indicate that 387,000 pairs of shoes worth $900,000 were imported from India to Russia during the first six months of 2010. This ac- counts for 0.2% of total shoe imports. During the same period, 137.7 metric tonnes of shoe uppers, worth $1.6 million, were imported, ac- counting for 7.8% of Russian imports of shoe uppers. Fi- nally, Russia could collabo- rate with India in the same way as the European pro- ducers. The leather manu- facturers’ body says that low production costs in India are increasingly more appealing to Russian shoe manufactur- ers.


'Our products enjoy greater confidence'


Nidamarti Mallikarjuna Rao of the Council for Leather Exports in Moscow, is upbeat about the Indian leather exhibition.


tions to 4,500 Russian com- panies that sell leather items and footwear. We hope they will come. At this point, any effort will be positive. Things will be more certain after the exhibition, when we see who came, what kind of buyers, and whether any contracts are signed.


Are Indian leather producers planning to expand in the Rus- sian market? Representatives of 33 Indian companies producing leath- er bags, clothing, footwear and accessories, will be com- ing to Moscow on November 22. This exhibition is our fi rst experience in Russia. Previ- ously, we used to bring our leather producers to Russia as a part of general exhibi- tions and fairs. This time we are holding a separate leath- er exhibition. We sent invita-


Do you have any idea which Indian products will be in de- mand in the Russian market? Companies are asking what samples to bring. I don’t know. On the one hand, peo- ple here are not very rich. On the other hand, Russians dress very stylishly, prefer- ring to buy one expensive item rather than a lot of cheap ones. As Indian companies make products for almost all the global brands, I am sure they have relevant experi- ence. Take footwear products: the Russians will be closer to Italy in terms of demand. The British model, for instance, won’t work here. British boots can be passed on to your children, whereas, in Italy, fashion changes every six months. Russians, too, love fashion and style.


What are the prospects for In- dian producers in Russia? Will there be more competition? The Soviet Union was the Indian leather industry’s biggest partner. After this partnership collapsed, we began to look for other mar- kets. Our companies had to im- prove the quality of their products. Today, India is an important player in leather export markets. We supply products to the US, which is our main partner now. It ap- pears that breaking up with the USSR was good for our leather industry. Previously, we just delivered our prod- ucts and collected payment; now we have to improve the quality. Russia has always worn leather and it always will. We don’t have too many rivals. India produces leather for such brands as Pierre Cardin, Tommy Hil- figer, Versace, DKNY, and Hugo Boss. I think Indian products have a small psy- chological advantage. Rus- sians have more confi dence in Indian products and we produce better quality items.


At the moment, supplying coal for domestic consumption in Russia is even more attractive for producers than exporting it


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AP PHOTO/BIKAS DAS


SERGEY GAVRILENKO_KOMMERSANT


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