Since the separation of SUEK from the MDM financial group, their experience in the Russian market has not been rosy. This year has seen a drop off in production against 2003 - both from milder weather and also from reduced sales due to non-payment problems, particularly in Eastern Siberia.

Meanwhile, the Russian government has appointed single export coordination companies - UES for power and Gazprom for gas - to ensure a reasonable degree of state control and revenue returns from the industry.

“Much as Gazprom suffers from its social obligation to supply the population at greatly reduced prices of gas, SUEK will also suffer a similar fate if it remains tied to the UES power plants. There is a huge growth constraint on the company based on the domestic power market,” said Bob Gallagher, principal consultant (mining), International Mining Consultants. IMC has been active in the Russian coal sector since 1991.

“Gazprom manages to do so well through exports to Europe which underpin its infrastructure investment and field development, as well as funding market expansions to places like China, Korea and Turkey.”

With all of its recent acquisitions complete, SUEK’s immediate focus will be on integrating the new mines into the company structure, making them more productive and more profitable, and trimming down poorly producing assets. And within the next two to three years the capacity of the mines under SUEK’s control is expected to increase by about 11.4Mt, with this coal largely targeted for export.

The majority of coal from this area is thermal coal, broadly equating to sub-bituminous B to A and bituminous high volatile C to B grades.

The company’s most recent purchase was concluded on June 10, when SUEK bought the Kiselevskugol company from the Rusinkor Group. Mines owned by Kiselevskugol included the Kotinskoya longwall steam coal operation which went into production in April this year. Other mines were Novokazansk Western, Taiga, May, Dalniye Gory, Krasnokamenskaya, Kiselevskoye PTU. These mines produced 4.3Mt of coal in 2003.

SUEK has indicated these mines would be analysed in detail regarding their financial position, the economic problems of mountain production, and their situation in the sphere of social-working relations. Complex analysis developed by the company Sokolovskaya will be used; Sokolovskaya has been under SUEK’s administration since early this year.

SUEK purchased its first nine mines in the Kemerov province in the middle of last year as a breakup of Kuzbassugol, increasing SUEK’s output by 11,9Mt. In February 2004, SUEK took control of the Sokolovskaya company, comprising three mines. This deal increased SUEK’s capacity in the Kuzbass region by 4Mt per annum. The company’s first priority was to pay off the accrued payroll, to the value of 30 million rubles.

Speaking in Kuzbass recently SUEK director general Peter Khaspekov, announced plans to invest US$500 million increasing the output of the Sokolovskaya mines. Russian media reported US$333 million was earmarked for the purchase of equipment from DBT for which the contract was reportedly concluded. SUEK plans to install equipment in the Mine No.7, Taldinskaya-Western 1 and Taldinskaya-Western –2.

Regarding the Kiselevskugol group, Khaspekov said production schedules would continue until July 1 when the operations came under SUEK control. It is understood that SUEK will not change the expansion plans put in place in February for the 3Mtpa Kotinskaya mine.

Mines previously held by Kiselevskugol which SUEK considers problematic are Dalniye Gora and Krasnokamenskaya. According to Khaspekov these mines are not expected to close immediately but will rather be gradually phased out with the gradual transfer of their workers into the new enterprises.

SUEK’s buying spree effectively places practically all Kiselevsk coal enterprises under SUEK’s control with over 20Mt of coal per year, under its control in the region. Kuzbassrazrezugol is the region’s largest producer and Russia's biggest coal exporter, primarily of steaming coal.

Kuzbassrazrezugol is also on an expansion drive, with some 6Mtpa of capacity targeted from purchase of new equipment with a further 9Mtpa expected to come from improve labour productivity. The company produced 40,13Mt in 2003 and has plans to produce 41Mt this year, rising to 55Mt in 2010.

SUEK is in the throws of establishing some kind of joint venture partnership with Kuzbassrazrezugol, which also attempted to acquire Kiselevskugol. Khaspekov indicated some initial plans were in place between SUEK and Kuzbassrazrezugol about conducting "joint business in a number of directions, such, as coal mining, railroad and sea transportation".

SUEK’s plans include increasing its presence in western markets. The company has created its own transport company and will aim to deliver directly to users, with Europe the first target.

“A new producer for export is emerging,” Gallagher said, “however it may be that the sales are made under the Kuzbassrazrezugol banner (ie SUEK coal supplied to Kuzbassrazrezugol to be sold under its banner).”

“My view is that exporting via Kuzbassrazrezugol is a move directly in the direction to maintain balance and risk while expanding volumes. It also helps that Kuzbassrazrezugol has its claws on major port capacity access including equity and SUEK has none.”