Current presentation was presented on McCloskey's European Coal Conference in Nice, May 2009. It discusses competitiveness of Russian Coal on European market; historic trends of Russian coal export, current production, adn transportation constrains and costs, crisis challenges; discusses Russian coal industry development scenarios and gives recomendations to coal producers and coal users.

1. Russian coal on European market ‐ market influencer or
market follower? A8er crisis challenges.
McCloskey European Coal Outlook Conference,
Nice, May 2009
Igor Shelukhin
Coal Market Research
Ins5tute/Russian Coal
Procurement Company

2. Some triggers for European coal users
• Over last years Russian coal turned from market follower to market leader with more
then 30% market share in Europe
• Europe is already dependent upon Russian coal same way it is dependent upon
Russian gas
• Crises brought many uncertainKes into market ‐ can Russian coal industry offer
compeKKve prices and provide stability of supply?
• How much of Russian coal can be sucked by Japanese consumpKon with Far East
infrastructure development and thus increase opKons for arbitrage for Russian coal
producers?

3. A historic review shows unprecedented growth of export
market supply
With majority of growth and share coming from sales to Europe
Russian coal sales by sector (mtpa) Russian coal export by
desKnaKon
Source: Russian Coal Market Research InsKtute

4. Demand has dropped and reply from Russian coal industry ‐
drop in producKon
‐6.7% ‐7.3%
‐8.1% ‐4.3% ‐3.8%
1.3%
‐5.0%
32% 2%
14% 4%
10% 5% ‐9%
‐10% ‐18% ‐20%
‐10.4%
‐10.0%
‐8.9%
‐7.7%
‐10.5%
3.4%
‐8.1%
Source: System Operator RAO “UES”, Central Controlling AdministraKon of Fuel‐Energy Complex

5. As Russian coal is marginal on European market it is the most
vulnerable to demand reducKon
$/t
Russian CIF ARA cash cost compeKKve posiKoning, $/t 2008
80
Current Price
level
60
Indonesia
Russia
USA
Russia
40
Australia
South Africa
Columbia
20 South Africa
40 80 120 160
Key factors 1. Internal Russian cost factors: railroad tariffs, naKonal currency exchange rate
influencing
compeKKveness 2. Global coal demand: South African coal diverKng to India and Australian to Asia
of Russian coal 3. Dry cargo freight rate
Source: Wood MacKenzie

6. Taking into account all realisKcally possible cost reducKons for
Russian coal export it is sKll high cost
$/t
Average Russian coal delivered cost reducKon potenKal (in USD/t)
‐ current cost (RUR/USD = 33)
80 ‐ cost reduc5on poten5al
7.0 0 71.2 ‐10.8
‐ lowest poten5al Russian coal
cost
12.0 ‐3.6 ‐7.0
60
32.0 ‐4.8 53.3
46.2
40
Average
Lowest
20 18.2 ‐1.8
Mining and Port, quality RUR/USD
Railroad Total average Total potenKal
enrichment and other Freight exchange rate
transportaKon cost cost
cost charges effect
Low poten5al ‐ Railway monopoly Already at If second
High port
crises wave to Lowest cost is
export mines use expected to charges existed historical low.
come Ruble for high
high produc5ve decrease tariff as due to
value is produc5ve
equipment, volumes drops, insufficient port
expected to mines with no
enrichment addi5onal capacity. This is
decrease to enrichment
required, pressure from coal expected to
38‐40 required
government companies lobby ease up.
RUR/USD
employment
regula5on

7. Future economy development is sKll extremely uncertain
Some revival in leading indicators But constantly declining global GDP forecasts
As an outcome investment decisions are paralyzed.
Source: OECD, IMF

8. Three possible world economy development scenarios foreseen
“Fast recovery” scenario “Back to normal” scenario “Slow recovery” scenario
Each scenario will bring different Russian coal export prospects, from fast return on growth path
in “Fast recovery” scenario, to drop in exports to 30% off from 2008 figures in “Back to normal”

9. European customers might find themselves short of Russian coal
• Average reducKon of 2009 investment program for Russian mining companies is 30%
• New port capacity aiming to add 50% of throughput is on‐line on Far East of Russia
aiming increase of Asian export
• Expected closure of BalKc ports will decrease throughput capacity available for
European exports
• Japanese companies are very acKve in Russian offering co‐investment opportuniKes
and low‐cost financing
• New projects developing Asian market supply are under consideraKon and realizaKon
(Tugnui, Elga)

10. SoluKon is Kghter links with Russian coal miners
ImplicaKons for buyers ImplicaKons for Russian producers
• Scenario planning for procurement strategy • Scenario planning for market and investment
required strategy required
• Develop measures that can be implemented to • Focus your investment program on mines with good
reduce share of high‐cost suppliers in your porlolio geology
• Try to understand investment and development • Search for domesKc and niche markets for coal
plans of your long‐term suppliers ‐ are they targeKng coming from low efficiency mines ‐ household
cost reducKon heaKng, cement producKon, etc
• Develop opportuniKes to co‐invest in mines with •Develop fast measures for freezing producKon on
good efficiency prospects for stability of supply low efficiency mines in case of further downturn
• Think about spin off opKons
• Consider government relaKons acKvity that could
bring to dialog for railway tariffs decrease and port
regulaKon

11. Contacts
CMRI / Russian Coal Procurement Company
Russian Coal Procurement Strategies, Market Research,
Investment Projects Due Diligence, Strategic Insight
Igor Shelukhin
Director on Strategy and Development,
Tel: +7 926 535 3435
ishell@post.ru