Company profile

SUEK

December 2009

Index

Introduction........................................................................................................................3

History of the company......................................................................................................3

Porter 5 forces analysis of the Russian coal market........................................................6

Competition among existing players................................................................................6

Bargaining power of suppliers........................................................................................11

Bargaining power of buyers............................................................................................12

Threat of newcomers......................................................................................................12

Threat of substitute goods...............................................................................................13

Domestic activities of the company.................................................................................13

International activities of the company..........................................................................15

Industry Trends and SUEK’s strategy...........................................................................17

The role of the government..............................................................................................17

Influence of crisis..............................................................................................................20

Conclusion: SUEK Corporate Strategy.........................................................................21

List of references..............................................................................................................24

Introduction

Nowadays SUEK is the largest coal-energy company in Russia and one of the

world's leading coal - mining companies. The coal and electricity business of SUEK is

located in nine regions of Siberia and the Far East. Coal reserves of SUEK are among

three largest coal companies in the world, and in field of production it occupies the

seventh place. SUEK has become one of the most important members of the international

coal market, ranking the fifth among its major world’s exporters.

In Russia SUEK is one of the largest producers of fuel resources and provides

about 30% of the total production of Russia coal. SUEK surely ranks first among Russian

coal companies on the production of both open and underground mining. Company holds

a leading position in Russia's coal industry in terms of investment into modernization of

coal-mining technology, as well as growth and achieved performance in labor

productivity.

SUEK is the largest supplier of the energy coal on the domestic market: the

company provides 43% of Russia's supply of coal for electricity in the country, including

50% in power systems of Siberia and the Far East. SUEK is the largest supplier of the

russian coal on the worlds market, providing 24% of its exports.

Moreover SUEK is one of the major private investors in the Russian power

industry. The Companies in which capital SUEK takes part are 7% of all power

generation facilities of Russia. In particular, SUEK is the largest shareholder of

"Kuzbassenergo" and "Yenisei TGC (TGC-13), which provide electricity and heat

in the Kemerovo region, Altai Territory, Krasnoyarsk Territory, Khakassia Republic and

the Republic Tuva with a total population than 9 million people1.

History of the company

The history of SUEC company begins in the 2001 when the building of Siberian

Coal Energy Company (SUEK) was started. In the area of interest of SUEK coal

enterprises in the Chita and Irkutsk regions, Buryatia Republic were included. It starts

with the implementation of anti-crisis program conclusion of the coal industry from the

1 СУЭК Сибирская энергетическая компания [Электронный ресурс] // ОАО «СУЭК». – 2009. - Режим доступа: http :// www . suek . ru / , свободный. – Загл. с экрана.

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crisis state, the payment of arrears of taxes and wages. The next year the formation

process of the coal base continued by establishing the enterprises of the Krasnoyarsk Krai

and the Republic of Khakassia. SUEK was holing a leading position in terms of pre-

extraction and supply in Russia's coal industry. It started with the implementation of

investment program aimed at the technical re-equipment of extracting enterprises.

The 2003 can be marked with further geographical expansion. Enterprises in the

Kemerovo region, Primorsky and Habarovsky were put under SUEK’s leadership. That

year the company became a leader among the domestic coal companies. Program of

increasing export capacity of SUEK was launched. Finally, the corporate structure of

SUEK was formed.

The next year several enterprises in the town of Kiselyovsk appeared this has

strengthen the position in the Kuzbass region. In general, completed the implementation

of a comprehensive anti-crisis program has normalize financial situation of enterprises,

return them back to discipline, more efficient production, as well as stabilized the

situation in sphere of social and labor relations. It was decided to unite on the basis of

SUEK coal and power assets, which were in the zone of strategic interests of the

company. Plan for consolidation of assets was approved by antitrust bodies.

In 2005 a reform of management systems was initiated. First the Board of

Directors was formed the majority of which was compound of independent directors.

Them was developed and adopted the new Corporate Code of Conduct2. Company

focused on a medium-term development strategy. At the same time the work of an export

trading company SUEK AG has began. SUEK became a Russia's largest exporter of coal.

Finally it has started a project to build coal terminal in the port of Busan (Khabarovsk

Territory).

The next year can be characterized by sustaining strong position in the top ten

world’s rankings largest coal companies. The company went on the international capital

market: involved two major syndicated loan from international banking consortia are

posted financial credit notes (CLN). SUEK is "actively involved in the development of

and reform of regional companies of power industry, which it is a shareholder. That year

SUEK has publishes its first report on sustainable development.

One of the most remarkable years in the history of the company was the 2007.

That year the company SUEK implemented the most wide Russian investment company

in the coal industry. Among main priorities of the program are: retrofitting and acquisition

2 СУЭК расскажет о себе все [Электронный ресурс] // Rbc daily. –2005. –РосБизнесКонсалтинг. - 1995 - 2009. – Режим доступа: http://www.rbcdaily.ru/archive/2005/06/15/203509, свободный. – Загл. с экрана.

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of brand-new, productive and safe technique and equipment infrastructure. Also company

SUEK has debuted in Eurobond issue of up to $ 400 million is a high probability that the

bonds will be issued in the first half of 2007. According to observers, coal miners create a

credit history before the IPO, which could take place later this year3.

In order to improve the management of the company administration decided to

create the regional production associations, consolidating mining and transportation

enterprises. A non-profit organization called "Fund of social and economic support for

regions “SUEK to regions”” was established. Its main role is to provide social and

economical help to regions where SUEK is working. One of the most significant

investment projects to increase the capacity of railway stations in the loading, through

which the supply of goods runs, became the project, on railway station Terentevskaya -

Construction of Park "O" as a technical station driveway the reconstruction of the existing

track development. Construction of the Park "O" was performed for the provision of

shipment of coal from the Sokolov Coal field.

The most recent history of SUEK is connected with further expansion as a

shareholder. At the same time mine several new plants, operating on melting of Coal

Mine Methane were launched. Several mines were among the most effective in the world.

In particular, the shaft "Kotinskaya" in 2008, three times updated a month to a record of

all the Russian, extraction of coal and one of lava on this indicator is one of the best

mines in the world. In five regions were implemented pilot projects of non-commercial

organization "Fund of social support of the regions SUEK to Regions". In particular, in

the town of Kiselyovsk commissioned first and foremost residential complex for miners.

It began building the fleet to service the Waninskogo dry bulk terminal. Put into operation

the first turn of the Park "O" --one of the key infrastructure investments, SUEK oriented

projects, implementation of which enables significantly increase the production and

shipment of coal4.

Porter 5 forces analysis of the Russian coal market

3 СУЭК делает шаг к бирже [Электронный ресурс] // Rbk.daily. –2007. – 3A-marketing. -2006-2009. – Режим доступа: http://www.3a-marketing.ru/news/1169622414, свободный. – Загл. с экрана.4 СУЭК: годовой отчет 2008 [Электронный ресурс] RCB. - 2008. – Режим доступа: http://kgo.rcb.ru/otchet/suek_otchet_rus_2008.pdf, свободный. – Загл. с экрана.

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Competition among existing players

First of all we are going to make an overview of the main foreign and home

players on the Russian market which compete with SUEC.

ArcelorMittal is a metallurgical and coal extracting company with a headquarters

in Luxembourg City, Luxembourg and employs about 316,000 people. The group

recorded revenues of $124,936 million in the financial year ended December 2008

(FY2008), an increase of 18.7% over the financial year ended December 2007 (FY2007).

The operating profit of the group was $12,236 million in FY2008, a decrease of 17.5%

compared with FY2007. The net profit was $9,399 million in FY2008, a decrease of 9.3%

compared with FY2007.

ArcelorMittal has steel-making operations in 20 countries on four continents.

ArcelorMittal generates revenues through six business segments: flat carbon Europe

(26.9% of the total revenues, before eliminations, in FY2008), long carbon Americas and

Europe (22.7%), flat carbon Americas (19%), steel solutions and services (16.3%), Asia,

Africa, and CIS (9.2%), and stainless steel (5.9%).

Europe, ArcelorMittal's largest geographical market, accounted for 53.9% of the

total revenues in the FY2008. Revenues from Europe reached $67,365 million in FY2008,

an increase of 14.9% over FY2007. Americas accounted for 32.8% of the total revenues

in the FY2008. Revenues from Americas reached $40,938 million in FY2008, an increase

of 18.1% over FY2007. Asia and Africa accounted for 13.3% of the total revenues in the

FY2008. Revenues from Asia and Africa reached $16,633 million in FY2008, an increase

of 39.5% over FY2007.

ArcelorMittal acquired three coalmines from Russia's open corporation Severstal

in 2007 for $718 million, becoming one of the few foreign companies to enter the market.

The main target was to provide an important and competitive source of coking coal

supplies for their steel production. The deal included a 97.59% stake in the Berezovskaya

Mine, a 99.35% stake in the Pervomayskaya Mine, the exploration and mining rights to

the Zhernovskaya-3 coal deposit and the Severnaya Coal Preparation Plant as well as

three companies that provide the mines with associated services. ArcelorMittal also

purchased 100% of the Anzherskaya mine and intends ArcelorMittal to start exploration

at the Zhernovskoye deposit in 2012.

As the crisis hit and capacity went down, the company wanted to temporarily close

one of their mines, which created a one-of-a-kind incident. In July 2009 it faced threats

from regional authorities due to fears that it might cut jobs at Siberia coalmines. 6

Authorities were threatening to revoke licenses for two ArcelorMittal coalmines if the

company moves to shut them down and many lose their jobs. It was the first case a

foreign company has been targeted over job losses. The company employed 5.800

workers in Kemerovo region this summer5.

Another important foreign company for Russian market is BHP Billiton Group

(BHP Billiton). It is a diversified natural resources group engaged in mineral exploration

and production. The group's primary focus areas include oil and gas, aluminum, copper,

nickel, iron ore, manganese, metallurgical coal, and energy coal, with additional

exposures to uranium, gold, zinc, lead, silver, and diamonds. BHP Billiton comprises

BHP Billiton Limited and BHP Billiton Plc.The group has a global presence with more

than 100 operations in 25 countries. It is headquartered in Melbourne, Australia and

employs about 42,000 people.

The group recorded revenues of $59,473 million in the financial year ended June

2008 (FY2008), an increase of 25.3% over FY2007.The operating profit of the group was

$24,145 million in FY2008, an increase of 22.4% over FY2007.The net profit was

$15,390 million in FY2008, an increase of 14.7% over FY2007.

In Russian BHP Billiton signed a strategic alliance agreement in June 2006 with a

Russian steel conglomerate, Norilsk Nickel. According to Dow Jones the two companies

plan to start mining coal in the Russian Arctic from 2015, the first production to result

from a three year old alliance between the companies. BHP Billiton will join Norilsk in

developing the Syradasai deposit in a project. 

The director of Norilsk Nickel said that the alliance is beneficiary for both, as

some projects are very expensive and risks should be split up with a reliable partner.

Furthermore BHP Billiton is able to provide modern technology and facilitate project

development.

The project is expected to produce 8 million tons per year, a figure that's expected

to double within a few years. The Syradasai deposit itself is about 100 km (63 miles) from

the port of Dikson on the Kara Sea, even further north than Norilsk's Arctic nickel, copper

and palladium mines.

The project is still in exploration phase, structured in a joint venture company that

consists of exploration and development subsidiaries. The Russian company has 50% plus

one share, whereas BHP Billiton has 50% minus one share6.

5 AccelorMittal [Электронный ресурс] // AccelorMittal. – 2009. - Режим доступа: http :// www . arcelormittal . com / , свободный. – Загл. с экрана.6 BHP Billiton Group [Электронный ресурс] // BHP. – 2009. - Режим доступа: http :// www . bhpbilliton . com / bb / home . jsp , свободный. – Загл. с экрана.

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The main competitors of SUEC among Russian companies are Mechel and KRU.

In brief, SUEC is the leading company on the Russian coal market both in

extracting amount and revenues. It is a public corporation with headquarters in Moscow.

The largest coal company in Russia and the 7th in the world. This large enterprise is one

of the major employers and owns several coal mines throughout the country, as well as

minority stakes in 27 regional energy companies. In 2008 the total output was 96.2

million tons, with the anticipated stock around 5.8 billion tons.

Mechel is an integrated mining and steel company engaged in the production of

mining products, such as coal, iron ore, nickel, and steel products. The company has

facilities in Russia, Romania and Lithuania. In addition, Mechel owns two trade ports, a

railway and an energy company. The company primarily operates in Russia, Lithuania,

Kazakhstan, Bulgaria and Romania. It is headquartered in Moscow, Russia, and employs

85,032 people.

The company operates through two business segments: mining and steel Mechel's

mining segment comprises production and sale of coal (coking and steam), iron ore and

nickel, which supplies raw materials to the company's steel business and also sells raw

materials to third parties. The segment fulfills 100% of the coking coal, 92% of the iron

ore and 55% of the nickel requirements of the company's steel segment. It also produces

coking coal in Russia, and exports coking coal concentrate.

The company's steel segment comprises production and sale of semi-finished steel

products, carbon and specialty long products, carbon and stainless flat products, and

downstream metal products including hardware, stampings and forgings. The segment is

also involved in the production of long products specialty steels and alloys, and produces

coke, both for internal use and for sales to third parties. The company's steel business is

supported by its mining business, which includes coal (coking and steam), iron ore, nickel

and limestone.

The company recorded revenues of $9,950.7 million in the fiscal year ended

December 2008, an increase of 48.9% over 2007. The company's operating profit was

$2,556.3 million in fiscal 2008, an increase of 82.9% over 2007. Its net profit was

$1,140.5 million in fiscal 2008, an increase of 24.9% over 2007.

In 2003 Mechel was incorporated. In 2004, Mechel Steel Group acquired a

controlling stake in izhstal. In the following year, in 2005, Mechel, through its wholly-

owned subsidiary, Littel Echo Invest, acquired 1,010,498 ordinary shares, or 25 % + 1

share of the company's charter capital, in OJSC Holding Company Yakutugol from the

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Ministry of Property of the Republic of Sakha (Yakutia). In that year, the company

changed names of its Romanian facilities to Mechel Targoviste and Mechel Campia

Turzii, and acquired Port Kambarka OAO Mechel sold its coal mining subsidiary Mechel

Coal Resources TOO located in Kazakhstan in 2006.

In the same year, the company acquired a metal scrap processing company in

Chelyabinsk and a controlling stake in Moscow Coke and Gas Plant OAO. In 2007, the

company acquired the controlling stakes in Southern Kuzbass Power Plant, Kuzbass

Power Sales Company, Yakutugol OJSHC and Elgaugol, and also acquired Bratsk

Ferroalloy Plant, Port Temryuk-Sotra.

In January 2008, Mechel appointed Mr. Stanislav A. Ploschenko as Chief

Financial Officer and Mr. Mukhamed M. Tsikanov as the Senior Vice President of

Economics and Management. In the next month, the company signed an agreement on a

long–term, mutually beneficial partnership with Russian Railways (RZhD OAO).

Two months later, in April, Mechel signed a partnership agreement with Danieli &

C. Officine Meccaniche for the implementation of reconstruction and development

projects for Mechel’s steel subsidiaries. At the same time, the company purchased 100%

Stake in Ductil Steel. In June 2008, Mechel acquired remaining shares of Southern

Kuzbass OAO, Korshunov Mining Plant OAO and Southern Urals Nickel Plant OAO

from minority owners of these subsidiaries. At the same time, Mr. Igor S. Kozhukhovskiy

was appointed as a Director. Three months later, the company acquired 100% stake in

HBL Holding by its Mechel Service OOO service and sales subsidiary. At the end of the

year, Mr. Vladimir A. Polin was appointed as the Senior Vice President at Mechel. In

January 2009, Mechel entered into an agreement with Gazprombank to arrange for the

financing of a universal rolling mill installation project at its Chelyabinsk Metallurgical

Plant (CMP OAO) subsidiary.

The company’s subsidiaries acquired 100% shares and interests of U.S. entities

Bluestone Industries, Dynamic Energy, JCJ Coal Group, and some of its West Virginia

affiliates in May 2009. In the following month, in June 2009, Mechel’s subsidiary,

Mechel Trading, signed a long-term coking coal supply contract with South Korean

Hyundai Steel7.

The second largesy coal company is Kuzbassrazrezugol. The company is one of

Russia's leading hard coal producer and had a total coal output of 46.3 million tons (mt) in

2007, including 5 mt of coking coal.

7 Мечел [Электронный ресурс] // Мечел. – 2009. - Режим доступа: http://www.mechel.ru/, свободный. – Загл. с экрана.

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In 2007 KRU exported approx. 46% of its output (which is approx. 25% of the Russia's

total coal exports), mainly to Europe and South East Asia. KRU operates 17 coal fields

with 11 open pit mines, all concentrated in the Kemerovo region of Russia (the Kuzbass

Basin). The company's coal production is supported by its developed facilities including

washing plants, processing complexes and transportation infrastructure. KRU reports

2,300 mt of proven and probable coal reserves which implies a reserve life of approx. 50

years. The company is controlled by private individuals and managed by UGMK-

Holding, beneficially owned by its president, Russian businessman Iskander Makhmudov.

KRU has strong positions in the domestic coal market and several different coal

production lines (coking coal, steam coal and sized coal). We expect KRU to benefit

additionally from domestic sales over the medium term in light of the liberalization of

domestic gas prices and the government's preference towards coal-fuelled energy plants.

We consider KRU's intention to invest in transport infrastructure and the modernisation of

assets to be a positive step. The acquisition of 300 railroad cars planned in 2008 could

partially protect KRU from Russian Railways' aggressive tariff policy. New coal

preparation facilities are expected to be ready by the end of 2008, which is a significant

step towards higher cost-efficiency and the production of higher quality coal with lower

ash content. We also note that KRU is less subject to state regulations concerning labour

safety because open-pit mining has a lower risk of accidents. KRU also benefits from the

diversified export sales provided by the exclusive non-consolidated distributor Krutrade

AG, which in turn is a strategic partner of Glencore8.

In general one can say that the Russian coal market is an oligopoly market

controlled by several large private owned companies.

Bargaining power of suppliers

Bargaining power of suppliers in the industry is rather high, because high value of

coal extracting and coal treatment equipment. Generally coal extracting companies have

to purchase the equipment. That’s why supplying companies have a strong financial

leverage, they are actually setting the prices for the equipment. These prices form the final

8 Кузбассразрезуголь [Электронный ресурс] // Кузбассразрезуголь. – 2009. - Режим доступа: http://www.kru.ru/ru/, свободный. – Загл. с экрана.

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price of the produced coal and it is too high than coal is not a profitable source of energy

any more.

Another point which creates the power of suppliers is connected with

technological aspect. Expensive foreign equipment represents brand new technologies in

extracting, but they are rising the price of the final product. Generally Russian coal

mining is characterized by low technological level and out-of-date equipment.

For exporting companies it is particularly important to transform the coal

somehow. Coal liquating equipment is essential for this purpose. Moreover, the role of

another supplier connected with coal transportation is very important. Transportation

companies as shipping and railway companies put over very high prices for their services

and without infrastructure it is impossible to develop. In Russian the transportation coats

are very high which makes are certain barrier for the industry.

In Kemerovo the following method of improving of economic performance in the

regional industry was taken it is a general agreement with the Ministry of

Communications: in exchange for a guarantee from the region to do any obligations

towards railway men, the region was given attractive tariffs for cargo transportation. One

can say that in the region the idea of total state control is realized, which intends to rely in

its actions on the government.

Relationships with suppliers create short-term liabilities. As for the SUEK

company, the company’s short-term liabilities for 2008 equaled RUR 42,025 mln vs.

RUR 28,555 mln as of December 31, 2007. The bigger part of debts increase is related to

the debt of the Company to SUEK enterprises. There are no overdue accounts payable.

Relationship with suppliers are evaluated by the Company as stable and longterm; short-

term credits and loans from RUR 11,495 mln as of December 31, 2007 up to RUR. The

increase is due to attracting new loans (OAO Kuzbassenergo and Sigor Investments) and

credits (OAO Alfa Bank, ZAO UniCredit and VTB Bank Austria) and increase of the

rouble estimate of debts on the previously attracted foreign currency credits.

Bargaining power of buyers

In general buyers do have strong bargaining power, because usually coal is sold to

big manufacturing and metallurgical companies which use it as a cheap power source.

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Coal, despite its ecological harm, is actively used in any economy of the world. There are several

main directions of its usage.

First of all, it can be used in electricity industry. In addition to electric public utilities,

manufacturing and various companies with their own power plants use coal to produce electricity.

Power plants burn coal, thus generating steam to drive turbines directly generating electricity.

Secondly, it is used in industry. Many industries use high temperature, which is able to

provide coal and its byproducts. Individual components of coal (eg, methanol and ethylene) used

to create plastics, resins, synthetic fibers, fertilizers and medicines. In addition, a large amount of

coal burned in the production of concrete and paper industries.

Thirdly, it is often ured for producing steel. Coal is baked in hot furnaces to get a coke,

which is used in smelting iron ore in steel production. The use of coke can reach very high

temperatures at which steel becomes strength and flexibility - which is important in the

construction of bridges, buildings and vehicles.

During the first semester, the situation in Russia's coal industry briefly as follows: the

volume of production decreased by 15,1% - up to 137 million tons of coal demand is falling not

just in Russia but also in the global market.

Probable calculations of leading Russian organizations engaged in the coal industry in the

long term show an increase in demand for coal in Russia. Even the World Bank forecasts of

particularly pessimistic about the future of Russia's coal industry, demonstrates the growing

demand for coal since 2000.

Reduction of the relative demand for coal is only possible in the case of energy-saving

technologies, changes in the structure of production, which, as already noted, requires huge

capital investments. Branch, the former with the administrative system of managing the grant was

currently in a very difficult situation. We cannot expect long-term conservation support from the

state does not have, and she must seek out and use all available means of economic recovery.

To sum up, the coal extracting industry really depend on its buyers, because it is dealing

with big companies which can potentially find alternative energy source.

Threat of newcomers

The industry is protected from incomers because there are high entering barriers.

Economic Barriers are including high railway tariff transportation, distance field of

railway, the seasonal nature of consumption of coal, a significant amount of initial capital

needed to create the coal company. As the main administrative barriers can be noted the

need to obtain licenses for subsoil use.

Moreover to establish a new one has to obtain a coal reach area and nowadays the

main coal regions are already divided among existing players. Also this market is

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connected with high investments in equipment and low rates of return (10 – 15 years)

that’s why it is not attractive both for newcomers and investors.

Threat of substitute goods

For this market the threat of substitute goods is very high. In most cases coal is

used as power source and it can be substituted on other sources as natural gas, oil, nuclear

power, water power, wind power, sun power even burning wheat and so on. The main

advantage of coal is its cheap price, but at the same time it is a very harmful for

environment. Nowadays people are seeking for alternative energy sources and if a

powerful and cheap method will be found it will kill the coal industry.

Domestic activities of the company

SUEK is one of the largest fuel producers in the Russian Federation, ensuring

about 30% of Russian coal production. SUEK confidently hold the leading position

among Russian coal companies both in surface mine and deep mining. The Company is

among the leaders of Russian coal industry according to investments made into technical

upgrade of the mining process, as well as in terms of growth rates and achieved labor

efficiency.

SUEK is the largest supplier of the steam coal in the domestic market: it ensures

43% of the Russian coal supplies for the national power industry including 50% in power

systems of Siberia and Far East. SUEK is one of the private investors in Russian power

generation industry. The entities in which OAO SUEK holds an interest account for 7%

of the installed capacity of the Russian power generation industry on the whole.

Specifically, SUEK is the largest shareholder of OAO Kuzbassenergo and OAO Yenisei

TGK (TGK-13) which ensure power and heat supply in Kemerovo Region, Altai

Territory, Krasnoyarsk Territory, Republic of Khakassia and Republic of Tyva with the

total population exceeding 9 mln.

In 2008, SUEK kept growing its coal mining pace reaching an ever highest

production figure since its onset. Coal production made 96.2 mln tonnes1, 6% up on

2007. In the period in question, the growth was reported at companies located in

Krasnoyarsk and Zabaykalie Territories, Kemerovo Region and the Republic of

Khakassia.

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SUEK's brown coal production in 2008 went up 13% on2007 to make 47.72 mln tonnes.

The growth of inland consumption by companies in Krasnoyarsk, Primorye and

Zabaykalie Territories has played a decisive role in increasedbrown coal production.

The 2008 hard coal production equaled the level of the previous year totalling

48.43 mln tonnes. A major surge in hard coal production was reported at companies in the

Republic of Khakassia (10% up on 2007) and Kemerovo Region (4% up on the year).

This fact may be attributed to the successful implementation of the company’s investment

program alongside the steady domestic and overseas demand for coal produced by

Khakassia and Kuzbass companies. Open-pit mining totalled 66.77 mln tonnes, 7% up on

2007. Underground mining in 2008 went up 3% on the year to 29.38 mln tonnes.

In 2008 SUEK enterprises sold 95.7 mln tonnes of coal to consumers. As

compared to the previous year the amount of supplies has grown by 7.5 %.

SUEK is the largest supplier of Russian coal to the global market ensuring 24 % of

its export. International market accounts for 30 % of shipments of SUEK. The figure had

gone up from 5 mln tons in 2003 to 28.2 mln tons in 2008. Main areas of international

sales are the UK, Poland, Netherlands, Denmark, Japan, Korea. SUEK is one of steam

coal key suppliers for Europe. At that, the company seeks to simultaneously increase

Asian exports which is strategically attractive option due to the steady growth of market

demand for coal. The favorable geographical position of SUEK mining companies

enables to operate efficiently both in Europe and Asia adapting their supply volumes to

match the current market conditions9.

In line with this strategy SUEK top priorities both for domestic and international

activities include:

1. Establishing a highly efficient vertically integrated fuel and energy company

ranking high both in Russia and on a global scale, including:

• stable positions among major power suppliers in the Russian Federation;

uninterrupted power and heat supply to Siberian regions;

• highly reliable coal and power supplier offering high quality services to customers

in every segment;

• company showing high level of financial stability and investment-grade credit

quality close to sovereign rating;

9 СУЭК: годовой отчет 2008 [Электронный ресурс] RCB. - 2008. – Режим доступа: http://kgo.rcb.ru/otchet/suek_otchet_rus_2008.pdf, свободный. – Загл. с экрана.

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• global player involved in large-scale projects shoulder-to-shoulder with universal

leaders whose business principles rest on the high degree of social consciousness,

responsibility to the employees and environmental awareness.

International activities of the company

Talking about SUEK’ s international activities in coal trade and exports we should

mention the SUEK AG that was established in December 2004 as the exclusive exporting

company of Open Joint Stock Company “Siberian Coal Energy Company”

(OJSC “SUEK”), the Russian largest coal producer. It is the biggest supplier of the

Russian steam coal to the international market. SUEK AG delivers coal to more than 30

countries all over the world. Thereat, the company prefers to develop direct relationships

with consumers of coal. As a result, more than 70% of our sales are made directly to the

end-users. Principally, the origin of coal SUEK AG delivers is Kuzbass region, however

several production units in Khakassia, Buryatia and Khabarovsk region contribute to the

exporting of coal as well.

Referring to the figures, about 23.8 mio mt were sold in 2007 (including traded

tonnage) and the outcome of 2008 was about 25.8 mio mt. The expectations for 2009 is

about 26.5 mio mt. SUEK AG has become a member of GlobalCOAL international

trading system. SUEK AG, registered in Switzerland, is a 100% export subsidiary of

Siberian Coal Energy Company (SUEK). After having joined GlobalCOAL late August

2006, SUEK AG became the 58th member of the trading system and the first Russian

representative in GlobalCOAL. GlobalCOAL is the world's largest system for market

trading of coal and coal related services, information and instruments. Headquartered in

London, GlobalCOAL is comprised of leading global coal producers and traders.

In addition to sale of the Russian coal, which is produced by the enterprises

operated by OJSC SUEK, the company is effecting trade in coal of other Russian coal

producers and coal of non-Russian origin since 2007. In 2008 there was traded of about

0.5 mio mt of non-Russian coal and abt 1 mion mt of coal of other Russian producers.

The portfolio contains Indonesian, Australian, Chinese and Columbian coal. SUEK AG

carries out deliveries to be effected both by sea and rail.

Moreover, SUEK AG is the biggest charterer among Russia-related suppliers of

coal. It is chartered about 14.2 mio mt in 2007 and about 14.3 mio mt in 2008.

Company’s major concern in charterring is the Atlantic region where SUEK AG provides

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for more that 90% of all its seaborne sales to be effected on CIF and DES terms of trade.

The implementation of the price risk management permits SUEK AG to manage its

exposure to the coal and freight markets and optimize its growing portfolio.

Further development of the derivatives market appears to be inevitable and it is our

intention to act accordingly. Besides high quality of coal which is the must, SUES AG

underlines the following principles of doing business in its strategy

- direct relationships with consumers;

- long-term cooperation;

- individual approach to consumers’ needs;

- high level of service and reliability.

There are four main directions SUEK AG exports its coal to. More than 50 percent

of coal is exported through Murmansk and Baltic ports. All of those ports are equipped

with cleaning and crushing/screening equipment. Coal loaded and Baltic ports and

Murmansk goes to United Kingdom, Scandinavia (Finland and Denmark), ARA region,

Germany, Spain, France and other European countries. Another important direction of

seaborne deliveries is Far East. Shipments to Japan, South Korea and China, including

Taiwan, used to be arranged via ports of Vostochny, Maly and Vanino Bulk Terminal

(Muchke Bay) for such consumers as power stations, cement and metallurgical

companies.

The third direction SUEK AG deals with is Black Sea and Azov Sea (ports of

Azov, Izmail). Shipments are made from there to Bulgaria, Poland, Danube countries,

Baltic countries and other European countries.

Considerable tonnage of steam coal and semi-soft cooking coal is also delivered

by rail to Eastern Europe and CIS countries (Poland, Romania, Ukraine, etc.)

The task of SUEK AG is to ensure the high level of the quality of services and the

dependability of the coal supply to consumers. Therefore, the development of own

logistics capacities is one the top-priorities in the work of the company. In 2008, the first

phase of the coal terminal in the Muchka Bay of the Vanino port in the Khabarovsk

Territory will be put in operation. The planned throughput of the terminal is 12 million

tons of coal. In the future, the SUEK coal terminal is to become the largest in the Far East

and it will guarantee the reliability of supplies to one of the key markets of power station

coal – the market of countries in the Asia-Pacific Region. The access to the European

market is mostly through the established long-term relations with the Murmansk

Commercial Seaport.

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Industry Trends and SUEK’s strategy

Talking about current industry trends, Russian coal exports are likely to start

falling from 2009/2010 in favor of domestic demand, according to the data from SUEK

corporate representatives. Major coal exporter Russia has the highest coal cash costs in

the world - the cost of mining coal and transporting it to an export point. Russia's rail

costs to port are going to rise $7 a ton during the next three years from the current $36 a

ton. Port handling charges are also going to increase. At the same time, Russia's domestic

demand for coal is mounting. Russia's government has decided to reduce gas consumption

in power generation and increase coal use, to maximize gas exports. This will require a

extensive building of coal-fired power generation capacity, totaling 40 to 50 gigawatts

between now and 2020. Russia's domestic coal demand will rise from a current 130

million tonnes a year to 326 million tonnes by 2020, under one scenario, he said. A more

cautious scenario forecasts domestic demand rising to 252 million tonnes by 2020. The

coal exports will probably decrease by as much as 50 percent according to industry

analytics. Russian coal producers could eventually, like their Chinese counterparts,

switch between domestic and export sales depending on which offered the greatest profit

margins.

The role of the government

The coal industry is connected with an important source of natural resourse and

highly dangerous work that’s why it is highly regulated by Russian government. The main

law in this area is a federal law “Governmental regulation in field of extraction and usage

of coal, social protection of workers on coal-connected factories”. The law was first

published in 1996 and changed in 2000. Now we will look through the main fields of

governmental activity using the major example of Kuzbas region.

Nowadays achieving a high level of profitability in domestic coal production is

impossible without government intervention: regulations, control, material and financial

support. The main question here is where to extract coal more effectively. Federal

regulation provides consistency and differentiation from a regional perspective.

For example, Kuzbass is now experiencing a deep depression, but it used to be a mighty

industrial center of the country, and the economy of the country actually depend on it.

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The depression is worsen by the increasing subsidy dependence. But lately there is a

progress. Despite the economic crisis, financial flows are large enough and stable, so

virtually all significant enterprises in the region, burden by impressive debts, operates

external management. And external managers are controlled by administration area.

Another component of the Kemerovo method of improving of economic performance in

the regional industry was a general agreement with the Ministry of Communications: in

exchange for a guarantee from the region to do any obligations towards railway men, the

region was given attractive tariffs for cargo transportation. One can say that in the region

the idea of total state control is realized, which intends to rely in its actions on the

government.

The structure of budget in Kuzbass cities also reflects the changes in the

governmental role: the share of own funds have been cut down, subsidies from the center

have increased, although the labor and material resources are available in abundance. This

is true not only in the Kuzbass, but also in other regions of the country, whose budgets are

not balanced.

Management of state property in the area of extracting (processing) of coal is

exercised by the Government, Ministry of Fuel and Energy, the executive authorities of

subjects of RF. Public financial support to organizations for the extraction of coal is

provided by grants from the federal budget and the regional budgets for centralized

capital investments by providing tax incentives, preferential loans, through regulation of

tariffs for coal transportation, licensing activities, establishing safety standards of work on

coal. The annual appropriation for public financial support for organizations in the coal is

indicated by a separate line item in the federal budget.

The RF Government has undertaken to pay severance payments for workers. For account

of federal budget for counseling for retrenched workers, with additional funding for

retraining. According to the Law “social protection in the coal industry" (May 1996), all

benefits are introduced to the rank of federal. The industry has almost completed the

process of allocation of shares and the amount of shares owned by the government

directly has decreased. In the regional coal companies the government has included into

the authorized capital stock a state made of federal ownership shares of joint stock

companies in order to form a "healthy core" of technologically interconnected chain of

enterprises.

To expedite the process of acquiring coal enterprises in real effective owners and

create the industry's competitive environment, the government provides implementation

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of the program of selling shares in coal companies. Already in 1995 there were 10 small

private coal companies, whose share in total national production of coal amounted 9%.

Russia and the relevant subjects of the RF in order to ensure the competitiveness of coal

on the market are providing public financial support to coal mining. The Government

approves the list of heavy work and work in hazardous conditions in coal mining in

consultation with trade unions and the working time, minimum wage rates, supplementary

pensions are coordinated also with representatives of coal mining. In consultation with the

state authorities of RF subjects in the federal target program of restructuring the coal

industry may be included interregional and regional target programs. The authorities of

the RF subjects and local authorities may impose at the expense local budgets additional

means of social protection.

Carrying out industrial restructuring also in Kuzbass requires addressing social

issues: the protection of workers' interests at the closing of mines, the restructuring of

subsidies, etc. Financial base restructuring consists of own funds of coal enterprises, the

federal budget, budgets of the RF subjects. In early 1999, in Kemerovo the Government

meeting has adopted the program of restructuring of the coal industry.

In case of the bankruptcy procedure the government helps employers to hold all the

technical work, as the solution of this problem at the local level is less productive.

Regional and municipal authorities should control the process tightly, but often they only

require new subsidies. Lack of clear division of duties and responsibilities is the reason

that led to increased tension in the industry.

At the federal level issues which are important for the whole country are solved.

For example, establishing of legal principles of federal policy, monitoring (supervision)

on matters of public interest. The Board of Directors of coal associations, such as the

Kuzbass, will comprise 50% of the representatives of the region. Now it is possible to

block any decision that could harm Russia's economy and the Kuznetsk Basin. Issues

include the division of state property to the joint competence of the RF and its subjects.

For all other issues - subjects possess full state authority.

Significant adjustment to the concept of delimitation of competence between state

bodies of Russia and its subjects is required. The importance of certainty in these matters

is beyond doubt, as practically it is linked to the problem of unity and differentiation of

the federal and regional governance.

Despite the large number of federal and regional executive bodies, the control

action by the state of the industry and its industry acquires the character of a general

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regulation, i.e. the main thing now is to regulate, coordinate and control (supervision) on

the most fundamental issues of development of the domestic coal industry.

Influence of crisis

According to the Ministry of Industry and Trade, the dynamics of coal production in 2008

amounted to 103% relative to 2007. If you take the statistics for January-September 2008, the

growth of coal production stood at 107% of the corresponding period of 2007. But the financial

crisis and the concomitant drop in demand for coal has adjusted totals. In the last quarter of 2008,

monthly shipments of coking coal fell from 3.5 million tons to 800 tons

Last 5 years in the coal industry experienced a steady growth in coal production: in the

period from 2004 to 2008. it was 15% and reached 324 million tons of mined coal is structured by

type of use in the economy for thermal coal (energy) and coking coal (steel).

In recent years the coal industry undergone a process of consolidation of assets and the

formation of large holdings. This process corresponds to the global practice of mining, processing

and selling coal. In 2008, the coal mining industry of Russia in the 5 largest companies, producing

thermal and coking coal, accounted for more than 75% and 66% of production respectively.

One of the key constraints of the industry is the lack of development of transport

infrastructure, compounded by vast distances. If the decline in the availability and rising cost of

financial resources of a temporary nature, the lack of capacity of the transport network (railways,

ports, etc.) and logistics costs are permanent restrictions on development of the coal industry.

Major coal resources is concentrated in the Kemerovo region and Yakutia. The costs of

transportation in this case are becoming a key factor in the formation of prices.

In the most difficult situation turned out to be producers of coking coal. The reason was

the crisis in the steel industry, which was expressed in the reduction of production and,

consequently, to reduce the demand for coal. Inflated expectations miners in demand from the

metal-caused unwarranted growth of coal production in 2008, lead to overproduction and created

additional downward pressure on coal prices, after a reduction in demand. This fact is confirmed

by three-fold excess of the norm reserves of coal mined in the summer of 2008.

In the fourth quarter of 2008, the decline in production from the metallurgists worldwide

has reached 30%. Such predictions are confirmed Russia's practice. Thus, the largest producer of

coking coal, Raspadskaya in November-December 2008 has put consumers in four times less

carbon than that in October the same year: 150 thousand tons of concentrate against 650 thousand

tons. According to prognoses company FLC, the price of coking coal in 2009 will decline by 30-

40%.

The negative impact of financial crisis in the coal industry is manifested in the following:

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First, to reduce the demand for coal from both metallurgists, and from the Power.

Following a decline in demand followed by a sharp drop in prices, which led to a deterioration of

performance of companies in the industry.

Secondly, the growth of non-payment for the delivered goods. The crisis in the industry

led the growth of non-payment for delivered coal. According to the company FLC, the total debt

for delivered coal amounts to 22 billion rubles, of which the share of metallurgy accounts for 20

billion rubles.

Thirdly, to increase the deficit of available credit resources.

Fourth, changes in the ruble against the dollar and euro. Changes in exchange rates

primarily affects the cost of ongoing programs to modernize the production sector, since most

equipment is imported from abroad.

Reducing the volume of production - the main anti-crisis measure, implemented so far in

the coal industry. This reduction in production volumes reported not only Russia's coal miners,

but also companies around the world. Global coal industry leaders BHP Billiton and Rio Tinto

said the planned reduction of coal production in 2009 by 10-15%. According to the forecasts of

the company FLC, coal mining in Russia in 2009 could fall by 20%.

As a result of the financial crisis, the company reduced the coal industry or sent on unpaid leave

of 5-7% of staff. In the case of sharp reductions in the most vulnerable region is the Kemerovo

region - are concentrated more than 50% of coal production. To maintain social stability in the

coal regions require state support for the coal industry and social sphere of data subjects of the

federation10.

Conclusion: SUEK Corporate Strategy

Power generation in Russia brings both opportunities and challenges for SUEK.

Talking about opportunities we should mention the substantial value creation in

participation in rapid growth of Russian economy, modernization of plants and equipment

and introduction of management best practices. Mission of the Company is to be a

reliable supplier of energy to its customers improving living conditions for future

generations. Today SUEK is among Russia’s fuel and energy leaders;

the Company is country’s major coal producer and supplier and is among key players on

the world market; it is also one of the major energy suppliers. SUEK’s goals since the

onset have been as follows:

• to provide companies with modern equipment;

10 Угольная промышленность в условиях финансового кризиса [Электронный ресурс] // Компания «ФОК». - 2009. – Режим доступа: http://www.foconsult.ru/catalog/analitika/prod.php?rc=1149159689&pc=1242732952, свободный. – Загл. с экрана.

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• to introduce even more efficient and safe technologies;

• to conquer new markets (domestic and overseas).

Guided by best-practice corporate management standards, SUEK formulates new

approaches to social responsibility. Establishing one of Russia’s major fuel and energy

companies and obtaining a maximum synergy effect through the integration of coal

mining and power engineering

divisions are the top-priority goals within the Company's development strategy till 2020

approved in 2007.

In line with this strategy SUEK top priorities include following.

First of all, establishing a highly efficient vertically integrated fuel and energy

company ranking high both in Russia and on a global scale, which we had discussed

before.

Secondly, obtaining a maximum synergy effect through the integration of coal and

energy business. The idea of obtaining a synergy effect through the integration of coal

mining and power engineering divisions makes a base for establishing a SUEK-based

integrated fuel and energy company. Therefore, SUEK’s power engineering priorities are

basically focused on power production systems which use coal as basic fuel. As of today,

SUEK has secured these priorities by joining the list of shareholders of OAO

Kuzbassenergo and OAO Yenisei Territory Generation Company (TGC-13).

Thirdly, operational leadership (cost reduction) and innovative approach as a

competitive advantages. The highest possible labor productivity in coal mining, effective

risk management; modern environment-

friendly technologies; introducing standards of quality and industrial safety. Maximum

synergy effect through the integration of coal mining and power engineering divisions;

increased reliability and efficiency of power engineering equipment; construction of new

power generation facilities using advanced technology and design solutions in power

engineering. And development and introduction of innovations in every sphere of the

Company’s activity.

Fourthly, social responsibility and environmental awareness as well as corporate

governance based on universal standards. One of Russia’s best employers investing in

continuous professional growth at every managerial and operational level. increased

environmental safety of power and heat energy production as well as coal mining.

One of the Company’s priorities includes enhanced logistical capacities to ensure

smooth coal supply to consumers. The first-stage facilities of Vanino bulk terminal were

launched in 2008. The designed capacity of the terminal makes 12 mln tones of coal per

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annum. Vanino bulk terminal is expected to become the largest facility of the kind in the

Far East ensuring uninterrupted supplies to one of the major steam coal markets – the

Asia-Pacific.

In the context of the global financial crisis, the Company’s intensive investment

development strategy has been transformed into the moderate development strategy

focused on operational efficiency both in coal business and power engineering as well as

‘optional’ projects devised to maximally use the most attractive opportunities. The top

priorities of the strategy during the crisis include: maintaining acceptable profit level

under extremely unfavorable conditions; major effort to neutralize threats and/or

minimize their impact.

The Company is working hard to devise and implement measures to reduce and

neutralize the adverse effects of the crisis. Namely: he Company has devised and

implemented a program for cost reduction, optimization of size and structure of current

assets; the Company has corrected the investment program to adapt it to the changing KPI

of investment projects in the context of the new market situation; the Company has

altered its marketing strategy.

Regular coordination in such areas as operational efficiency management,

distribution of resources, maximization of synergy effects, entering new markets, hedging

and continuous innovative development ensures the Company's success in attaining its

strategic goals11.

11 СУЭК: годовой отчет 2008 [Электронный ресурс] RCB. - 2008. – Режим доступа: http://kgo.rcb.ru/otchet/suek_otchet_rus_2008.pdf, свободный. – Загл. с экрана.

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List of references

1. Генеральный директор компании СУЭК В.Рашевский: "Считаю реализацию

проектов на Дальнем Востоке успешной" [Электронный ресурс] //

Интерфакс-ЦЭА, 2007 – Режим доступа:

http://www.russianeconomy.ru/Interviews/DetailsView.aspx?ID=392,

свободный. – Загл. с экрана.

2. Кузбассразрезуголь [Электронный ресурс] // Кузбассразрезуголь. – 2009. -

Режим доступа: http://www.kru.ru/ru/, свободный. – Загл. с экрана.

3. Мечел [Электронный ресурс] // Мечел. – 2009. - Режим доступа:

http://www.mechel.ru/, свободный. – Загл. с экрана.

4. Распадская [Электронный ресурс] // Распадская – 2008. - Режим доступа:

http :// www . raspadskaya . ru / , свободный. – Загл. с экрана.

5. RB.ru деловая сеть [Электронный ресурс] // ООО «Юнайтед Пресс». – 2008. -

Режим доступа: http://www.rb.ru/biz/companies/show/4677, свободный. – Загл.

с экрана.

6. СУЭК: годовой отчет 2008 [Электронный ресурс] RCB. - 2008. – Режим

доступа: http://kgo.rcb.ru/otchet/suek_otchet_rus_2008.pdf, свободный. – Загл.

с экрана.

7. СУЭК делает шаг к бирже [Электронный ресурс] // Rbc.daily. –2007. – 3A-

marketing. -2006-2009. – Режим доступа:

http://www.3a-marketing.ru/news/1169622414, свободный. – Загл. с экрана.

8. СУЭК опубликовала первый социальный отчет [Электронный ресурс] //

"ДЕЙТА.РУ". -2007. – Режим доступа: http://www.deita.ru/index.php?

news,,,,78305, свободный. – Загл. с экрана.

9. СУЭК расскажет о себе все [Электронный ресурс] // Rbc daily. –2005. –

РосБизнесКонсалтинг. - 1995 - 2009. – Режим доступа:

http://www.rbcdaily.ru/archive/2005/06/15/203509, свободный. – Загл. с экрана.

10. СУЭК Сибирская энергетическая компания [Электронный ресурс] // ОАО

«СУЭК». – 2009. - Режим доступа: http :// www . suek . ru / , свободный. – Загл. с

экрана.

11. Угольная промышленность в условиях финансового кризиса [Электронный

ресурс] // Компания «ФОК». - 2009. – Режим доступа:

24

http://www.foconsult.ru/catalog/analitika/prod.php?

rc=1149159689&pc=1242732952, свободный. – Загл. с экрана.

12. AccelorMittal [Электронный ресурс] // AccelorMittal. – 2009. - Режим

доступа: http :// www . arcelormittal . com / , свободный. – Загл. с экрана.

13. BHP Billiton Group [Электронный ресурс] // BHP. – 2009. - Режим доступа:

http :// www . bhpbilliton . com / bb / home . jsp , свободный. – Загл. с экрана.

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