EXPORT. Coal not only for roubles
The coal industry of Kazakhstan is on its way to a disaster, and the solutions shall not be limited only to a deeper coal processing. The coal processing technology alone will not resolve the problem. According to the Executive Director of the Association of mining and metallurgical enterprises, Nicholay Radostovets, the industry should increase exports to the foreign markets to keep the stable development.
Mr.Radostovets, how do you evaluate the demand for our coal, taking into account the reduction of purchases from the part of Russia?
In fact, by 2020 Ekibastuz coal exports to the Russian Federation may decrease from 20 million tonnes, expected on the results of the current year, to mere 17-18 million. Deliveries to Russia are now falling rapidly due to the import substitution programme, implemented at power stations in Siberia.
We believe that this kind of extrusion is contrary to the spirit of the free market which shall exist in the territory of a unified customs territory. Reduction of internal consumption of electricity over the past year from 94 billion kWh to 91 kW *h shall only deepen the problem. Increasing electricity export to Russia from Ekibastuz plant in some way can balance a recession during the second half of the year, however, the drop in demand for coal in Kazakhstan is quite obvious.
In comparison with the last year, there is also a decrease in exports of Shubarkul coal. This contributed to the rising cost of diesel fuel prices: deregulation, shortage of rolling stock, barriers at the ports. In 2015 the growth of overseas deliveries occurred due to adjustment the internal Russian railway tariffs for Kazakh shippers. Now a massive write-off of wagons in Russia moves the rates up. It is clear that the domestic market of the wagons falls under this influence, and eventually, a shortage of rolling stock occurred in anticipation of an increase in the rates within the country. Besides, a transshipment in the ports is hampered by their low accessibility and incentives for resale to the traders. In spite of it, we can see that certain coal companies are trying to operate in the area of public procurement in Russia, and they do it rather successfully. Perhaps, keeping the positions of Kazakhstani coal in the neighbouring market could be facilitated by a cancellation of a rental tax. Moreover, its inconsistency rules in the unified customs territory is confirmed by the Russian partners and Eurasian regulators. However, we believe that introducing the tax on natural resources production on coal is not feasible. Ultimately, the introduction of this tax will increase the price of products, and hence, the cost of heat and electricity in Kazakhstan, i.e. the utility fees. Coal is a social good. The rather high tax burden of the coal producer is enough for them. Introducing an additional tax, stimulating the subsequent inflation, is not a good decision.
What the AMMC undertakes to avoid falling production volumes in the future?
Now we are preparing a package of proposals for the Government to support the coal industry. Talking about the long term period, we plan to set more momentum for the coal reprocessing and enrichment. In principle, the major share of coal companies have already started to work on it- the projects on using the coal and its waste for the production of fertilizers, building materials, electricity, gas, liquid fuel, sorbent, activated forms, varieties of coke. If we want to display the reprocessing and enrichment to a new level over the next 10-15 years, then we need the economic incentives from the State. They can be in form of direct subsidies, preferential loans and establishing a chain of cross-sectoral cooperation with agriculture, energy, transportation, and construction spheres. The build-up of scale economy will bring the coal technology projects to a financially self-sufficient and competitive level in the regional markets. One should be very careful when limiting the greenhouse quotas, methane formation and emissions. The coal producers will fulfil their obligations by 2020, however, the steps in this direction can disturb them greatly.
We also believe that it is necessary to reduce the financial burden on the coal industry by introducing tax deductions for the purchase of diesel fuel. Deduction of 1% profit for the R&D activities will be rather feasible than deductions from the total annual income, as usually required by the obligations to the State. The coal industry is very specific and requires no annual revolutionary innovations. While the coal enrichment and reprocessing have an opportunity of an extensive development only in the case of large-scale operations, full and well thought-out State program for a long-term period that could be proposed by the Ministry of energy on the basis of the ideas of coal producers. Such a programme should include the tax deductions for the companies with the following repartition. Then they will be more actively involved in the coal chemistry.
However, the reliance only on the coal processing will not help the coal industry, the involved workers and entire towns that depend on the coal mining. For this issue, one should also present the issues of adaptation to global markets, exports to the foreign countries. This requires the "green" transport corridors for coal caravans in the Baltic and far East.
Separate issue is a problem of coal safety during transportation by rail within the country. According to our information, for example, only during the first three months of the current year, the volume of losses resulting from theft of Shubarkol coal amounted to 16 thousand tons at one of the coal producers. The issue is not resolved yet, because the existing law does not require obligatory accompaniment of coal cargoes by a paramilitary guard. At the same time, new rules for the carriage of goods, recently issued by the Ministry of investment and development, stipulate that the coal shall be weighed before and after arrival to the place of unloading. However, the purchase of additional weights for more than 200 KTZh stations need more than 2.2 billion KZT. We are working on this issue with the state authorities, railway companies, to prevent that the costs of mass theft will not be transferred to the residential customers in the utilities sector. Because unresolved problems will continue to decrease the demand for Kazakhstan's coal and to discourage the coal production.
We are going to challenge the import substitution programme in Russia for Ekibastuz coal to be replaced by gas and Kuznetsk coal as contradictory to the spirit of free competition. But even now its implementation continues rather by inertia, and the Russian energy cannot refuse from Ekibastuz coal deliveries in the next four years, without additional funds. In addition, we are witnessing a trend towards greater energy control by the State and resistance to further invest in import substitution in the Eastern Russia, where the coal producers themselves are going to explore more possibilities of the coal chemistry. It might indicate that the trend will change, particularly within the EEU. Therefore, we think that the demand for Ekibastuz coal would continue to be strong in Russia.
At the same time, the Ekibastuz coal will still be sold in Almaty, Astana, Karaganda, Pavlodar, North Kazakhstan. Its consumption will somehow decrease, but we shall continue to invest in the industry that remains a traditional source of energy where coal for us, as the social goods, influenced many consumers and miners, forming the entire towns. In the recent years the coal production received several billion dollars as investments, and we should not lose this money, invested in the modern equipment, technology and personnel. For example, recently an advanced coal project up to 800 thousand. tons was launched in Karaganda- now its achievements could be repeated in Pavlodar region.
Other producers-Shubarkol Komir, Maikuben are actively exporting the coal to Russia and other countries. The volumes have dropped due to increased transaction costs, but the recent reports in the Western mass media predict the coal prices a good rally that will allow to recover our position for a while. Such producers as Karazhyra are working aggressively to get an access to Russia and Eastern Europe, without ignoring the internal market. That is, in general, the industry is adapting to external and internal changes, although not without reduced pace.
This year due to high water in the Irtysh river, too much of hydroelectricity produced, which also reduced the demand for electricity, developed at the coal-fired plants. But even with the increased role of hydropower and possible gasification of the northern part of the country, the coal industry will remain key in terms of strategic and demand generation over the next five years, as the reorientation to the gas fuel will take years. By the end of this period we will be able to make the first big steps in the coal and coke chemistry, processing and enrichment that will add value through processing and keep demand for Ekibastuz coal and coal fuel from the other deposits.
In accordance with the Concept of green economy, the role of RES should steadily grow. How will this affect the coal industry?
The Ministry predicted that in the next five years, the share of renewables in the electricity system will grow twice. Perhaps, it is related to the fact that the subsidized alternative electricity was expanding uncontrollably, while the electricity consumption in the country has dropped. The main factor for demand reduction was the decline in the production of metallurgical enterprises, as well as their policies for improving the energy efficiency. For example, Aksu Ferroalloy Plant JSC, STC Kazchrome and Bogatyr coal LLP reduced the consumption rates in the Pavlodar region. Kostanai region decline happened as a result of falling consumption at SSGPO JSC and Kostanai minerals JSC, and in the East Kazakhstan-due to Kazzinc LLP and UKTMK JSC. That is, essentially, the enterprises of mining and metallurgy sectors, which again took to the relative rise of production, will subsidize the rapidly growing sector of renewable energy sources, now requiring the monetary indexation of their tariffs, despite the fact that they are in 4-7 times higher than those of the coal-fired generation.
We believe that the development of RES should not be at the expense of coal economy and enterprises of mining and metallurgy sector and we do oppose such indexing. On this issue, the AMMC supports an initiative of the Ministry of energy to organize the auctions for mapping new RES projects, tailored to the needs of regions, their climatic conditions and availability of infrastructure. Such a tool is needed to prevent the occasional and unscrupulous investors to introduce the economically irrelevant projects during the strategic time in the process of transition to a green economy.
We have created the favourable conditions for renewable energy sources, and the Ministry of energy is right when declaring that the alternative energy market need to be arranged to attract the serious investors to Kazakhstan, rather than the temporary ones, focused on the instant profit.
Other mechanisms of the development of renewable energy sources, existing in the world, can be implemented in our country. For example, the European Union imposed annual quotas for the local energy companies on electricity production from the renewable energy sources in amount of 2-15% of total sales. That is, they can build the RES and to work under the selected renewables quota. But if an energy company does not sell or produce "green electricity" for any reason, it should procure "green certificates". Proceeds from their sale go to a direct subsidization of alternative energy development. In our view, it is required not to follow the way of shifting the one’s costs to the others, and new ways are needed to organize the financial model for RES.
Businesses shall be allowed to choose mandatory purchasing of expensive alternative electricity through settlement and financial centre or to build the same RES facilities, depending on the level of own production capacities and electricity consumption. In doing so, the enterprises will have to channel their "green electricity" on production needs, or to sell it under the bilateral contracts without compulsory sale via settlement and financial centre at KEGOC. Therefore, the companies will seek the continual cost reduction on RES and offer the market-driven solutions, based on the real economy, without any intermediaries and subsidies that distort the economic incentives.
So, it is not necessary to discuss a real competition between the coal generation and renewables, because the costs made by the now existing investors under the established tariffs for "green energy" are simply not feasible. When the RES investors will be able to offer its electricity for two cents per kilowatt hour, as it was the case of a recent tender in Dubai (which is comparable with 8-10 KZT per kilowatt hour of coal-generated electricity), then one can talk about the replacement of traditional energy. In any case, we should not forget that coal generation creates far more jobs than renewables.
The State plans to legally bind the transition from VAT on sales tax. What risks arise in the mining business in the case of the adoption of these amendments?
I believe that the debate around the sales tax should be stopped and removed from the public agenda. The introduction of such a tax is unpredictable for economy and it greatly increases its risks, since the return on investment model is incomprehensible to the banks and investors. This tax is not widely used in developed countries, in addition, all our neighbours on the EEU apply the VAT.
According to our projections and calculations of the National Chamber of Entrepreneurs "Atameken", replacing the VAT with sales tax will provoke a cascade increase in the net cost of mining and metallurgical products. We will not see any benefits from such innovation and will see only rising prices, killing our competitiveness. This is due to the fact that the sales tax should be levied on each subsequent sale. Therefore, the value chain for the subsoil users, purchasing the Kazakh services and products, will inflate to become more expensive.
Is this really what we need now, when there is a slight decrease in industrial performance? For several times our Association addressed the financial&economic block of the Government and the public to stop discussion about the sales tax. Instead, we shall concentrate our efforts on improving the practice of levying VAT and its administration. At the moment, the Ministry of national economy is aware of our opinion. There was a protocol stipulating that the sales tax will not be imposed with use of cascading method.
How the competitiveness of our mining products in the global market will affect the recent two-fold increase in the domestic price of liquefied petroleum gas?
If you look at the map, now 10 of 14 regions of Kazakhstan are provided with gas supplies to varying degrees. Increase of gas prices will lead to increased cost mainly for the metallurgical enterprises in Kostanai, Shymkent and Aktobe regions. In Almaty region and South Kazakhstan the metallurgical facilities are insignificant, and those in Zhezkazgan rely primarily on the coal generation. Indeed, Kaztransgas Aimak said about raising its distribution tariffs in Aktobe and Kostanay region. Besides, Intergas Central Asia plans to raise its tariffs for gas transportation since November in 2.5 times. On the one hand, it is less than 11 x increase, which originally was requested by the operator of main networks. However, at the public hearing we said that acceptable growth should not be more than two times. Otherwise, in our opinion, the electricity and heat supply for such enterprises as SSGPO, Aktobe Ferroalloy Plant, Taraz metallurgical plant might be under threat, because in the end, the sale price will rise. Let it be possible following the approval of the product gas prices in June of the next year, where the limit is set at the level of 15%, but the growing trend will continue for five years. All this can greatly affect the cost of mining & metallurgical production, increasing it for about 1% in the first wave of increasing the gas rates by the monopolists. At first glance, the numbers seem small, but in the global perspective, the competitiveness of production counts for shares of per cent.
As a result, reaching the peak costs, the businesses begin to cut back production, and hence the volume of gas consumption. In some regions, SMES are already showing a decline in demand for this type of fuel. Perhaps, such a market situation will influence the gas monopolists.
Nikolay Vladimirovich Radostovets
In 1976 he graduated from the Almaty Institute of National Economy with specialty: Economist. Doctor of Economics.
In 1976-1991 - younger scientific associate, scientific secretary, team leader, doctoral student and head of the Institute of Economics of the Academy of Sciences of Kazakhstan.
Since 1991-the Deputy Chairman of the State Committee of the RoK for Antimonopoly Policy. Since April 1996- the Chairman of the State Committee of the RoK on the pricing and anti-monopoly policy. Since March 1997-the Vice Minister of Economy and Trade of the Republic of Kazakhstan. Since October 1997-the Chairman of the Committee on pricing and anti-monopoly policy of the Agency for strategic planning and reforms. Since May 1998-the Chairman of the Committee for regulation of natural monopolies and protection of competition of the Ministry of energy, industry and trade. Since July 1998-the Chairman of the Committee for regulation of natural monopolies and competition. Since January 1998-the Chairman of the Agency of the RoK for regulation of natural monopolies and competition. Since October 1999-the Minister of labour and social protection of population of the Republic of Kazakhstan. Since February 2001-the President, Vice President of the Eurasian industrial association. Since April 2003-the President of the Association of exporters of Kazakhstan. Since 2004-the President of the Union of commodity producers and exporters.
From May 2005 -the Chairman, Executive Director of the Association of mining and metallurgical enterprises of the RoK.
In 2005 he received the Kurmet award.