Andrei Karunos

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b>Metallurgists are getting increasingly interested in possessing raw materials or, at least, in controlling them. Vectors of Russian steel companies’ development are being directed, among other things, at coal assets. As is known, coke is, so to say, metallurgy’s bread and, therefore, the desire to have one’s own ‘bakeries’ and high-yielding coal fields is quite understandable. As for Russia’s coal industry, having got through periods of decline and stagnation it has been showing in recent years a good dynamics of growth. And, to a significant extent, this growth has become possible thanks to investments by the steel sector, believes Vladimir Lavrik, the general director of the coal-mining company YuzhKuzBassUgol.
The main holders of coal assets include Russia’s leading steelmakers, such as the Mechel group (owns the company Yuzhny KuzBass), Severstal (controls the company KuzBassUgol), EvrazHolding (has stakes in the united coal company YuzhKuzBassUgol and Russia’s largest coal mine Raspadskaya). Just recently owners of Magnitogorsk Iron & Steel Works (MMK) have announced the acquisition of the coal mine Uregolskaya located, like all the abovementioned coal-mining enterprises, in the Kuznetsk Basin, which is the country’s largest coal-producing region.
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Vladimir Lavrik regards the completion of privatization in this sector of the Russian economy as the key event in terms of the current status of coal-mining enterprises. "Owners have been determined; it has become clear, who ‘the boss in the house’ is; development prospects and strategy have emerged", says Lavrik. In his opinion, there is one more important aspect: it has been proved by practice that the coal industry can become efficient and profitable. Finally, the third significant change in this sector is that there is no question today whatsoever of what to do with coal: there is a demand for both coking and power-generating coals. Sales of coal of all ranks are on the rise, sales markets are expanding inside the country and abroad. On the whole, Lavrik thinks that today’s situation can be characterized as ‘favorable’.
YuzhKuzBassUgol, in the words of its general director, is quite a typical Russia coal-mining company but by no means the ordinary one. It is the largest among those, which produce coal by the underground method. Vladimir Lavrik explains achievements of his company by the fact that it started "a little earlier" than others to get out of the crisis, in which the Russian coal industry was plunged in the 1990s, and that the company got an efficient owner ‘a little earlier’ than others.
In 2004 YuzhKuzBassUgol should produce 18 million tons of coal or twice as much as at the peak of the crisis in the coal industry during the mid-1990s. The existing plans call for mining 21.3 million tons of coal in 2005 and doubling the production volume in terms of saleable coal in the next five years. Lavrik is convinced that the company has everything needed for reaching these goals: reserves, infrastructure, highly qualified engineers and workers. "We are setting up a training system and our own engineering centers", says the general director. "We are switching over to international standards of designing, accounting, financial management, mining technology and equipment selection. I think that by these criteria we will be able to correspond to the level of the world’s leading coal-mining companies as soon as the start of the next year and in a few years we will try to get to the same level with them by all indexes", he points out.
Vladimir Lavrik is absolutely sure that the company should have ambitious plans and says that it is vitally important. He believes that if for now the fast expansion of sales markets is lessening the competition between coal-mining enterprises, the fight for customers in the foreseeable future will inevitably get tougher. In Lavrik’s opinion, it is necessary to get prepared for price fluctuations as well as for stronger requirements on the part of coal consumers. "I think that we still should expect crises with coal prices", predicts the general director. That is why, in his opinion, it is necessary to have a potential for reducing consumption of human labor, prime cost as well as for raising product quality. Vladimir Lavrik stresses that there is no need to invent anything new since it is quite enough just to study how companies in the U.S., Canada, Australia, Republic of South Africa or China operate, to adopt useful experience and to learn by mistakes of others.
Lavrik sees his company’s competitive advantages in the fact that it produces practically all ranks of coking and power-generating coals. And this, in his opinion, is turning out to be its trump card in the fight for consumers. "If coking coal is the case in point, then, metallurgists consume it in a mixture, like a kind of ‘cocktail’, and for them one rank of coal will not do. Therefore, it is more convenient and advantageous to buy this coal from a company that provides all range of coals", he says. Another advantage is the company’s solid economic position. YuzhKuzBassUgol’s production and financial indexes are such that they, in the words of its general director, let ‘withstand a blow’. Third, the company exports over 20% of its coal and the sales infrastructure that it has created allows YuzhKuzBassUgol to start increasing volumes of selling coal abroad in case of a reduced demand in the Russian market.
As far as the expediency of merging two different, coal-mining and steel, businesses is concerned, Vladimir Lavrik says the following:
"I think that, on the whole, this is a positive process. As for YuzhKuzBassUgol, two things should be noted. First, EvrazHolding is not just a leading player in the steel market but it is also a powerful financial and industrial group. Since the time that the Holding became a shareholder of YuzhKuzBassUgol, our company made a considerable progress in terms of its industrial development as well as in terms of finances, corporate governance and management quality. Second, we secured guaranteed sales. Under the existing agreement, YuzhKuzBassUgol should provide supplies of coal, in the first place, to the Holding’s integrated mills ZSMK, NTMK, NKMK and they should consume our coal. Thus, we are confident that at least 60% of produced coal or about the same amount that EvrazHolding consumes will be sold for sure.
The head of the coal-mining company does not see any special problems related to integration. He recalls past worries that after becoming co-owners of coal-mining enterprises steelmakers would start imposing their terms, setting too low prices, etc. That did not happen. Lavrik explains: "We are trading with EvrazHolding on the same terms, for the same prices as with other steel companies, for example, with ÌÌÊ and NLMK. As far as its shareholder is concerned, YuzhKuzBassUgol is precisely the same market partner as other coal-mining companies".
Being co-owners of coal-mining enterprises, EvrazHolding and YuzhKuzBassUgol are implementing joint programs. In particular, thanks to EvrazHolding the coal-mining company was able to construct two new mines: the property of the Holding-owned West Siberian Steel Corporation was mortgaged on credit repayment.
The present financial status allows YuzhKuzBassUgol to implement a technical re-equipment and reconstruction of its enterprises without resorting to loans. "In 2004 we did not apply for bank credits", says Vladimir Lavrik. "All the investment program for the year – and it is over $110 million – is being implemented through the use of YuzhKuzBassUgol’s profit. Contracts for supplies of mining equipment in 2005 have been signed as well".
As Vladimir Lavrik believes, one of the main goals of technical re-equipment is to raise the level of mining safety: "by purchasing new equipment we are driven not only by the desire to raise coal production but also by the need to significantly reduce risks related to workers’ health and lives". This is particularly important for Russia, where the overwhelming majority of coal mines have been in operation for over 25 years. "Today, from 80% to 90% of Russian mines are being operated with the outdated worn-out equipment and that is why it is just impossible to observe safety standards", insists Lavrik. In his opinion, the problem comes not only to the need of replacing mining and excavating equipment. An up-to-date breakage face can be assembled at any mine and put in operation in six months but it will not bring the expected effect with respect to either production volumes or safety level. It is necessary to modernize the whole infrastructure of mine, says Lavrik.
In the final part of the conversation Vladimir Lavrik expressed his opinion on prospects for Russia’s coal industry. In his view, the industry has a certain reserve for increasing production volumes but in 2005 this reserve may get completely exhausted. However, today’s volume of coal that is supplied to the market is quite sufficient. "Sometimes reserves of coal at steelmakers’ storage facilities are sufficient for just a month, not for the usual period of three or four months. This makes them nervous", notes Lavrik explaining the reason for speculations on the coal deficit. In his words, the nearest two years will put an end to the dispute about how much coal should be produced in Russia.
At present, rates of coal production are high. KuzBass (the Kuznetsk Basin), where in the last decade its production volume did not exceed 90 million tons a year, has already overstepped the 150-million point. By Vladimir Lavrik’s calculations, it is quite possible that the final figure will be by 15 to 25 million tons higher and this will be enough for filling up the domestic market. The industry’s further development will be ensured through reducing prime cost of coal production and raising coal quality. As for export shipments, the potential of Russian coal producers will depend, to a great extent, on throughput capacities of railroads and sea ports.
In the opinion of Vladimir Lavrik, already in mid-2005 coal producers may really feel challenged by competitors and quickly get down to negotiations in the interests of all market participants. As the general director of YuzhKuzBassUgol believes, these negotiations should be concentrated on regulating production volumes. After all, each and every coal-mining company has its own ambitious plans but "the market can consume only as much as necessary".
A growth of export shipments is possible and much will depend on rates of development of such gigantic economies as the Chinese one. "Precisely the Chinese market, to a great extent, has ensured sales of Russian steel and coal. Thanks to China!", concludes Vladimir Lavrik "Now we think that the same growth is about to start in India. It would be very much desirable to get a strong economic development in Russia as well. Then, maybe, even 170 million tons of coal from KuzBas would not do the job. And we do have all the necessary potential capacities to produce 250 million and even 300 million tons of coal a year".

Reference:
YuzhKuzBassUgol
One of Russia’s largest coal-mining companies (it accounts for 25% of underground coal production in KuzBass and 18.5% in the country as a whole), leader in producing and processing coking coals: it provides 77% of their total production volume. The company ships 76% of its coal to the Russian market. The main customers are metallurgical integrated mills and by-product coke plants as well as enterprises of RAO UES of RUSSIA. Export shipments embrace Ukraine, Bulgaria, Romania, Poland, Turkey, Italy, Republic of Korea.
EvrazHolding owns a 50-percent stake in YuzhKuzBassUgol, the other half of shares is controlled by the company’s management.
Profile:
Vladimir Lavrik, the general director of the Consolidated Coal Joint-Stock Company YuzhKuzBassUgol. Honored Coalminer of the Russian Federation, Honorary Worker of the Coal Industry, Doctor of Engineering Sciences.
Born March 7, 1954. Graduated from the Siberian Metallurgical Institute. In April 1997, which was the most complicated period for the Russian coal industry, the time of "rail wars" and coalminers’ strikes, Vladimir Lavrik became head of the association KuznetskUgol (at present, YuzhKuzBassUgol), country’s largest company of underground coal mining. Under his leadership the company has been implementing the program of establishing new promising enterprises and closing down unprofitable production facilities. Convinced that coal is one of the basic components of Russia’s economic might and prosperity in the 21t century. By Vladimir Lavrik’s initiative, the movement of the so-called millionaire coal-mining teams was revived in KuzBass. He is the author of 48 scientific works, 11 monographs and booklets.
Vladimir Lavrik was honored with the Peter the Great National Prize, Russia’s highest public award in management. He received this prize in the category "For efficient enterprise leadership and achievement of stable financial and economic indicators". For his long productive work in Russia’s coal industry he was also awarded the Coalminer’s Glory decorations of all three degrees (it is the highest decoration being awarded for coalminers’ valor). The laureate of Career, the All-Russian Contest. By results of 2003 he was included in the Top 100 of the most professional managers in Russia, The rating is conducted annually by the Association of Russia’s Managers.