Market Summary
Brief history of coalmining in Ukraine
Classification of coal in Ukraine
Donetsk coal basin (Donbass) was discovered in the 18th century. The industrial coalmining was started there in the 1870s. The extraction of coal was growing fast – from 1,4 million tons in 1880 through 11 million tons in 1900 and to 16,9 million tons in 1913. Before World War I Donbass provided 70.3% of all Russian coal. During World War I and Civil War in Russia (1918-1922) the coal extraction in Donbass reduced to only 4.6 million tons (1920).
Before World War II Donbass gave annually 83.7 million tons of coal (50.5% of the total coal output in the USSR). In 1990 (the last completed year of the USSR) the total extraction of mineral coal in Ukraine was 170.2 million tons, and 10.0 million tons of lignite. By coal output Ukraine was the second largest producer in Europe – after Poland.
Lvovsko-Volysnky coal basin was organized in the Western Ukraine (western part of Lvov region and southwestern part of Volyn region) after World War II. Initially it was extracting brown coal but by 1960s it was re-oriented at mineral coal.
In the 1930-1960s Ukraine was the main coal base in the USSR. Its importance started to reduce after Kuznetsky coal basin (famous Kuzbass) and Pechora coal basin were developed in the 1960s. By the end of the USSR Ukraine provided only 20% of the total coal extraction in the USSR.
In early 90s, when reform in the power industry was well under way and the gas industry had embarked on the first steps toward reform, Ukraine’s coal industry remained untouched by the changes happening in the country. In that years the coal industry employed 650,000 workers, who produced annually 66 million tons of coal in 276 mines and 64 enrichment plants.
In addition, 200,000 people were employed in supporting functions such as mine construction, machine building, and social services (such as kindergartens).
Labor productivity was far lower than in other countries, and about one-third of the mines produced coal at a cost above the import parity level. While a coal miner in Ukraine produced on average about 100 tons of washed coal in 1995, the comparable figures were 200 tons in Russia, 400 tons in Poland, 2,000 tons in the United Kingdom, and 4,000 tons in North America. High-cost mines received US$400 million in cross-subsidies from low-cost mines. The coal industry as a whole received US$240 million in budget subsidies, and US$500 million more from the rest of the economy in the form of an increase in the stock of (net) accounts payable during that year. Labor costs were too high, with payroll and disability allowances making up more than 40 percent of operating costs in 1995.
The 383 coal industry enterprises were managed by the coal ministry, which, following the tradition of central planning, appointed enterprise managers, set production targets and prices, and allocated physical and monetary flows. But this old industry model was under severe strain. Profitable mines were reluctant to transfer revenues to unprofitable mines, bringing them to the brink of financial collapse. The accumulation of uncollected receivables by the central coal marketing agency (Uglesbyt) created strong incentives for mines and mining associations to arrange their own sales (mostly through barter to minimize the risk of the coal ministry confiscating their revenues).
Lower prices, better availability, and superior quality led imported coal to capture an increasing share of the domestic market, reaching 20 percent in 1995. The lower prices and better service would gradually erode public sympathy for coal miners.
Miners were angered by delays in wage payments and by the deterioration in their wages relative to those of other industrial employees in Ukraine. To prevent social unrest in the main coal regions, the government had to pump liquidity into mines using unplanned budget outlays and credit guarantees. The coal industry and the Cabinet realized that fundamental changes were needed in industry operations. The proposed reform program, adopted in a presidential decree in February 1996, was discussed at a conference in April 1996 attended by central and local government officials, parliamentary representatives, labor leaders, and mine managers.
Many of the labor leaders expressed support for the reforms, including the closure of nonviable mines, subject to the availability of adequate social assistance. To cover part of the cost of the program, the World Bank approved a US$300 million loan to be provided to the budget in two equal tranches. The first tranche was disbursed in December 1996.
Capitalizing on a rare consensus in government and temporarily muted opposition in Parliament, reformers pushed through several important measures in 1996–97.
The 276 coal mines were divided into four categories. In the first category were 76 profitable mines intended to be privatized in the medium term.
The second category contained 105 mines that were given one year to regain profitability and graduate to the first category; otherwise they would be moved to the third category.
In the third category were 75 mines, scheduled to be closed within three to five years. At the 20 mines in the fourth category production stopped in anticipation of immediate closure.
Mines in the first and second categories were corporatized and placed under fifteen state-owned holding companies. These holding companies also included washing plants and marketing organizations. Mines in the third category were put under the direct supervision of the coal ministry. Mines in the fourth category were transferred to a newly created mine closure agency, the UDKR.
The use of accounting prices to effect cross-subsidies from low-cost to high-cost mines was abolished. Corporatized mines became free to market their own coal domestically and abroad at liberalized prices. Retail prices paid by households remained controlled by the Ministry of Economy, but the difference between wholesale and retail prices was covered from the budget. Noncorporatized mines were required to report to and agree on their prices with the Ministry of Economy. Managers of mines in the second and third categories were prohibited from making investments or recruiting new staff. Average wage increases were limited to the level of inflation. Bonuses were to be tied to reductions in operating costs. Financing of new mines was cut from the budget, and investment projects that were not economically justified were canceled.
Non-core activities were separated and privatized. A program to transfer mines’ social assets to municipalities was drawn up (and implemented for fifteen mines), including temporary financial support from the central government to municipalities to cover operating costs.
A target was adopted to close twenty mines a year. Mine closure procedures were developed with attention to social and environmental mitigation measures. Social mitigation measures included the payment of overdue wages, severance pay equal to three months’ wages, free coal for the winter, and special assistance programs such as job search counseling, reemployment support, micro-credit for small businesses, and labor-intensive public works projects.
In late 1996 and in 1997 budget support to the coal industry was refocused on restructuring. Of the US$800 million budgeted for the coal industry in 1997, US$300 million was earmarked to cover the physical cost of mine closures, statutory benefits to dismissed miners, the cost of maintaining and rehabilitating social assets transferred to municipalities, and special assistance programs for the unemployed. Production subsidies were to be concentrated on mines in the second and third categories and de-linked from the volume of raw coal produced. Relative to coal industry reform in other countries (Belgium, France, Germany, Hungary, Poland, Russia, the United Kingdom), Ukraine’s program was notable for combining a market-driven approach to select the surviving mines with a centrally controlled process to close mines that did not make it. Especially innovative was the establishment of a single agency to implement mine closures and manage most of the associated social mitigation programs.
Actual implementation of the 1997 coal budget was skewed in favor of production subsidies, while a major shortfall appeared in funding the closure of loss-making mines and associated social mitigation measures. Although closure of the first twenty mines commenced on schedule, there were delays in payments of statutory benefits to laid-off miners and in payments to contractors implementing the physical closures. Several additional mines applied for transfer to the agency responsible for mine closures, but it could not accept them for lack of funds. After the social assets of fifteen mines were transferred to municipalities, the social asset transfer program also came to a halt for lack of funds, and special assistance programs for unemployed miners encountered major delays. The closure of three mines was funded directly by the World Bank in the context of a pilot project, and these mines were less affected by the problems mentioned above.
The activities of mine managers remained focused on lobbying for production subsidies. Employment was not rationalized, and the expected concentration of mining activities on better mines did not emerge. The accumulation of payables, including wage arrears, continued unabated, increasing by US$1 billion between August 1996 and August 1997. Actions designed to contain cost increases were not implemented, and budget constraints on the coal industry remained soft. Most mines in the first category continued to receive production subsidies that remained tied to the volume of coal produced. The coal ministry argued that providing production subsidies to the low-cost mines was the only way to ensure the timely payment of wages, since these subsidies were virtually the only source of cash for the mines as a result of the widespread use of barter. Few employment reductions took place in operating mines.
Neither a bankruptcy framework nor a debt restructuring mechanism was put in place. And no effective supervision mechanism was established for mines in the third category. Given these deviations from the agreed reform program, the World Bank could not release the second tranche of the US$300 million loan in 1997.
Arranging barter trades and bombarding the finance ministry and Cabinet with requests for additional investment funds and production subsidies became the main occupation of the coal ministry. Seven new mines were under construction when the budget stopped providing investment grants. The coal ministry strongly argued for the completion of these projects despite clear indications that several of the new mines would not have been able to cover even recurrent costs. If funded through a loan, the additional capital cost of the best of these mines would have implied a debt service obligation of US$50 per ton of coal produced while the estimated market value of the coal was US$28 per ton. The ministry also developed new “reform” proposals, including centralizing all coal sales under the ministry (that is, reestablishing Uglesbyt), transferring mines in the third category to holding companies (that is, reestablishing previous coal associations), and transferring responsibility for mine closures from the UDKR to these companies. At the end of 1997 the ministry submitted a budget request of US$2.6 billion for 1998. When the Cabinet denied the request and proposed the same coal budget as in 1997 (US$800 million), senior ministry officials began soliciting additional funds from Parliament. This effort, however, was cut short by upcoming elections.
As soon as the new Parliament was formed, about forty mines went on strike, demanding the payment of overdue wages, additional wage increases, restrictions on coal imports, and a new system of coal purchases to be operated by the state. In one of its first resolutions, Parliament asked the Cabinet to develop a proposal for increasing budget support for the coal industry, reviving state orders for coal, developing the 1999 budget for the coal industry based on the estimates provided by the coal ministry, and preparing—without the help of foreign consultants—a new law on the long-term development of the coal industry.
Attempts to reverse reform backfired, however. Popular support for miners weakened when, starting in mid-1998, representatives of other professions that were also suffering from unpaid wages (such as teachers and nurses) argued publicly against giving special treatment to miners. Recognizing an opportunity, the government decided to revitalize the process of coal industry restructuring. A new coal minister was appointed in early June, and agreement was reached with the World Bank about a revised reform program—including the closure of twenty-four additional mines by the UDKR in the second half of 1998 and early 1999 (bringing to fifty-two the number of mines closed or under closure).
In addition, the government asked the Bank to prepare a project that would support further restructuring of the coal industry, including additional mine closures and rationalization of the operations of potentially profitable mines.
Despite pressure to use all available funds to settle overdue wage bills, the budget provided enough money to the UDKR to commence the closure of ten mines (of the agreed twenty four), and the Bank approved the release of part of the remaining US$300 million loan.
Although the depreciation of the hryvnia in August and September 1998 was expected to reduce the losses of operating mines, coal industry managers and labor unions continued their efforts to increase budget support for the coal industry, to reduce coal imports from Poland and Russia, to re-monopolize the trading of coal, and to restore the privileged status of coal miners. These efforts met with sympathy in Parliament, but they were opposed by the Ministry of Finance, Cabinet of Ministers, and presidential administration, because Ukraine simply could not afford the associated costs. Large coal consumers such as the power and steel industries also opposed the rollback of reforms.
Until 2004 the Ministry of fuel and energy managed all these coalmining assets and in October 2004 they established state holding (so-called NAK - National Joint Stock Company) «Coal of Ukraine». It united more than 120 coalmines, coal enrichments plants and few auxiliary companies like coal transportation and equipment repair plants.
After the change of the supreme officials in Ukraine in the beginning of 2005 the new rulers of the country have stopped all these processes implemented by NAK «Coal of Ukraine». Thus the Ministry of fuel and energy liquidated «Lugansk coalmining company», «Donetsk Coalmining and Energy Company», «Donbass Coalmining Company» and stopped the processes of merge of other companies.
On July 25, 2005 the President of Ukraine signed a Decree «On measures concerning improvement of state management of coal industry», in accordance with which the Ministry of Fuel and Energy of Ukraine was reorganized by separating the Ministry of Coal Industry of Ukraine from it. By Presidential Decree of Ukraine of August 18, 2005 Viktor Topolov was appointed Minister of Coal Industry of Ukraine. By another Decree he was dismissed from the post of the first deputy Minister of Fuel and Energy of Ukraine. Volodymyr Novikov was appointed first deputy Minister of Coal Industry who was dismissed from the post of the president of the National stock company «Coal of Ukraine».
At October 2005 the Government of Ukraine signed a Decree on liquidation of National stock company «Coal of Ukraine». All state-owned coalmines and shares of coalmines were transferred directly to the Ministry of Coal Industry of Ukraine.
At April 2009 the country’s Government announced further plans to privatize over 100 mines – but this was postponed due to political reasons.
Meanwhile – despite the political issues – few of the country’s largest and most effective mines were privatized; thus Ukraine’s richest businessperson – Rinat Akhmetov – could buy 3 coal companies, Krasnopdonugol in coking coal, and Komsomolets Donbassa and Pavlogradugol – in thermal coal. Another large mine – Krasnoarmeyskaya-Zapadnaya-1 – had been acquired with Ukrprominvest Group (whose owners were close to the country’s last president, Viktor Yuschenko) but then it was re-sold to Donetskstal Group; Mine named after Zasyadko was taken into rent with its employees at the late 1990s – and now its top-managers control the assets.
