Identifier
Created
Classification
Origin
08MOSCOW3599
2008-12-12 12:45:00
CONFIDENTIAL
Embassy Moscow
Cable title:  

RUSSIAN COAL: PRODUCERS WAITING FOR SIGNS OF DEMAND

Tags:  EFIN ECON ELAB SOCI RS 
pdf how-to read a cable
VZCZCXYZ0006
PP RUEHWEB

DE RUEHMO #3599/01 3471245
ZNY CCCCC ZZH
P 121245Z DEC 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 1130
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
C O N F I D E N T I A L MOSCOW 003599 

SIPDIS

STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR TORGERSON
DOC FOR 4231/MAC/EUR/JBROUGHER

E.O. 12958: DECL: 11/25/2018
TAGS: EFIN ECON ELAB SOCI RS
SUBJECT: RUSSIAN COAL: PRODUCERS WAITING FOR SIGNS OF DEMAND

Classified By:
Econ Minister Counselor Eric Schultz; reasons 1.4 (b) and
(d)

RUSSIAN COAL: PRODUCERS WAITING FOR SIGNS OF DEMAND

C O N F I D E N T I A L MOSCOW 003599

SIPDIS

STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR TORGERSON
DOC FOR 4231/MAC/EUR/JBROUGHER

E.O. 12958: DECL: 11/25/2018
TAGS: EFIN ECON ELAB SOCI RS
SUBJECT: RUSSIAN COAL: PRODUCERS WAITING FOR SIGNS OF DEMAND

Classified By:
Econ Minister Counselor Eric Schultz; reasons 1.4 (b) and
(d)

RUSSIAN COAL: PRODUCERS WAITING FOR SIGNS OF DEMAND


1. (C) Summary. Russian coking coal producers on 27 November
appealed to the government for assistance as they grapple
with unpaid bills owed to them by Russia's struggling
steelmakers. Although coal producers' most immediate
priority is to remain solvent in the face of their customers'
non-payment, the prospects of demand collapsing are more
worrying still, and producers are hoping government spending
on steel-hungry infrastructure projects will help. Our
contacts in the industry are preoccupied with understanding
how much of the slumping demand is caused by the current
market uncertainty and how much represents the new
longer-term realities of the economy. The GOR's increasing
willingness to provide direct support to parts of the real
economy offers the sector some hope, but we expect that coal
producers and the workers they employ are unlikely to escape
mine closures and layoffs. End Summary.

--------------
Payment and Demand Problems
--------------


2. (C) Leading Russian coking coal producers Raspadskaya,
Mechel, Belon, and Sibuglemet on 27 November sent a request
for government relief to Deputy Prime Minister Igor Sechin,
citing nearly $500 million in unpaid bills from their
customers in the steel industry. That non-payment has
emerged as a major concern -- despite the fact that nearly 70
percent of Russian coking coal production is wholly or
partially owned by the large steel companies Evraz (which
owns 40% of Raspadskaya),Mechel, and Severstal --
underscores the severity of the crisis's impact on the
metallurgical sector. Non-payment threatens to exacerbate
the downturn by leaving companies short of cash at a time
when credit is all but unobtainable. For Raspadskaya,
Russia's second-largest coking coal producer with some of the
highest profit margins and lowest debt in the sector,
non-payment is putting pressure on their immediate ability to

pay their workers and their operating costs.


3. (C) However, Raspadskaya is looking to demand, not
non-payment, to provide the true indicator of the severity of
the crisis. Aleksandr Andreev, Raspadskaya's Deputy General
Director for Strategic Planning told us on 13 November that
they would not have a real sense of the depth of the crisis
until February, when a new round of supply contract
negotiations would begin and give them more visibility on the
prospects for demand. Slumping demand is also a key concern
for Severstal, which has been insulated from the non-payment
woes facing less-integrated companies by the fact that it is
currently consuming all the coal it produces. "It all
depends on how many cars people buy," Boris Granovskiy, the
Strategy and Corporate Development Director for Severstal
Resources -- Severstal's mining division -- told us in a 5
November meeting. Granovskiy noted that demand for cars in
Russia had fallen only half as much as in the U.S., but he
attributed this to the fact that Russians were still
"spending like there's no crisis," in large part due to the
government's skittishness about discussing the burgeoning
economic problems.


4. (C) Granovskiy said he did not know what would happen to
demand once the scale of the downturn became apparent and the
GOR (and the media: "we don't exactly have a free media
here," said Granovskiy sotto voce) frankly discussed the true
state of affairs. He added that he was pessimistic about the
length of time it would take for Russia to emerge from the
current economic slump, noting that another key source of
demand, construction, had all but stopped and estimating that
it would take some three to five years for the economy to
turn around.

--------------
Calls for Increased Government Spending
--------------


5. (C) Our sector contacts expressed frustration with the
GOR's handling of the crisis to date, with particular
frustration for the reluctance to address the state of
Russia's real economy. "We hear that there's a recession in
the U.S. -- and if there's a recession there, what do we have
here?" asked Yuriy Malyshev, President of the Russian Mine
Operators' association and of the Russian Academy of Mining
Sciences in a mid-November meeting. "Our government isn't
used to painful but necessary things," said Granovskiy. He
noted that the government had focused its attention on
liquidity, but that the liquidity was not flowing through
because the banks were "trying to fix their own problems."
"We cannot borrow any money at any rate, even though our
balance sheet is good," he told us. He acknowledged,
however, that if the government simply forced banks to start
lending again "we would be right back in the same place we
were."


6. (C) The solution proposed by our contacts was a hefty dose
of government spending. Granovskiy felt the unaddressed
problem was the lack of demand for consumer products -- so
the government needed to spur that demand. He was hopeful
for the vast levels of government spending that had lifted
the U.S. out of the Great Depression, he said. "Investing in
infrastructure would do a lot of good," he told us, by
fighting unemployment and creating demand for steel and other
products. Malyshev agreed, saying that if building projects
-- whether construction projects or mine-improvement projects
-- were being curtailed for lack of financing, the government
should directly provide the credit to get work started again.

-------------- --
Hoping for a Slowdown; Fearing Something Worse
-------------- --


7. (C) Our contacts also expressed concern that the downturn
in demand might be something more than a temporary burst of
anxiety, as they had previously hoped. They are worried that
the downturn might, in fact, be a prolonged one followed by
lower growth. Granovskiy said he expected coal prices to
decline significantly over the next three to five years. In
response, Granovskiy said Severstal planned to hold off on
all its development projects (most of which were overseas)
save for those it had already launched, such as its
acquisition of U.S. coal producer PBS Coal. In Russia, he
noted that Severstal's coal operations were doing
comparatively well but that this was because its steel
operations were doing worse. The company was ordinarily
short coal, with internal coal production covering only half
of the company's steel-making needs. Now, however, they were
fully self-sufficient, a benefit at a time when coal prices
had yet to fall as quickly as had prices for steel.
Nonetheless, he said that Severstal did not expect much
growth in its domestic operations and was planning to
downsize its loss-making facilities.


8. (C) Andreev also expected demand in Russia to be weaker in
the long term. He said the company was looking to cut costs,
such as putting off geological work and other longer-term
projects. Andreev stated that Raspadskaya was not planning
to fire anyone just yet, but had moved to shorter workweeks
in response to current market conditions. The company
planned to put off making any "real" decisions about its
operations, including lay-offs, until February, when it would
take stock of the market. Andreev said that although the
company feared weaker long-term demand, it wanted to make
good decisions on what operations to maintain in order to
position itself for the upturn when it came.

--------------
Some Mines Likely to Close
--------------


9. (C) Malyshev told us he had a bleak outlook on the
sector,s immediate future. He specifically noted
Raspadskaya's shortened workweeks. Raspadskaya's major mine
is the most modern in Russia, he said, having recently
undergone a massive capital expenditure program. If this
mine, with its cutting-edge technology and low costs, had to
cut back on working hours, then the many mines throughout
Russia with older technology and higher technology were
likely to face major layoffs or even closures.


10. (C) Severstal's Granovskiy had a similar take. The
outlook for Severstal's coal-mining competitors was "not
positive," he said, but it was still "less negative" for
vertically-integrated companies like Severstal. Granovskiy
said matter-of-factly that if a non-integrated coking coal
mine lacked low costs and high quality coal it would have to
close. (Note: Coal, like oil, comes in a range of qualities
whose price increases with its quality. Much of Russia's
coal -- again, like its oil -- has many impurities and falls
at the lower end of the spectrum. End note.)

--------------
Comment
--------------


11. (C) We expect coal producers and the workers they employ
will not be able to escape some mine closures and layoffs.
The GOR's increased willingness to provide direct support to
parts of the real economy offers some hope. Certainly,
government assistance could help coal producers weather the
downturn as they struggle to pay their bills, and an
infrastructure boom could kick-start demand. However,
analysts had forecast problems in the sector even before the
financial crisis hit and many of Russia's mines were barely
staying afloat when the market was thriving. The key
variables in determining the extent of the closures and
layoffs will be not just the efficacy of the GOR's response
but, more importantly, the companies' ability to use the
grace period it provides to implement improved strategies.
RUBIN