The latest analysis from Wood Mackenzie focuses on the crisis in Ukraine, and the growing challenges affecting the coal, power and steelmaking space.
Wood Mackenzie’s recent findings have revealed a wider multi-fuel dependency across the power, mining and metals sectors – proving reliance on Russia is far more than just a gas story. From July into August 2014 an increase in hostilities in Eastern Ukraine (Donetsk and Luhansk regions) resulted in major damage to critical pieces of energy and mining infrastructure – with serious implications for Ukraine’s wider energy complex in the all important months leading to winter. The latest findings from Wood Mackenzie are summarised in the following key facts:
Key considerations for Ukraine’s coal, power steel and iron ore industries:
- Donetsk and Luhansk regions – the worst affected areas – account for 75% of all coal mining in Ukraine. As of early September, regional disruptions halted coal production leaving up to 30% of mining activities unavailable and significantly impacting coal production. Ukraine produced 83.5 million tons (Mt) of raw coal in 2013; 59.8 Mt thermal and 23.7 Mt metallurgical. Wood Mackenzie forecasts thermal coal production will be 13% lower in 2014 and metallurgical coal production will be 29% lower year on year largely as a result of the slowed activity.
- The shortfall in metallurgical coal and damaged infrastructure has hit steel production. Ukraine is the 10th largest steel producing country in the world with crude steel production standing at 33 Mt in 2013 – 70-80% of which is exported. Ukraine also produces 80 Mt of iron ore per year – around a third of which is destined for the export market. Reduced domestic steel production could divert Ukrainian iron ore volumes to the export market, putting further downward pressure on the already over supplied global iron ore market.
- Available generation capacity at the country’s thermal coal power plants has been reduced due to total destruction of boilers, damaged transmission lines and substations and bombed rail delivery routes. Combined with lower thermal coal supply, Wood Mackenzie expects that Ukraine’s coal-fired power generation output will fall short of meeting domestic winter demand by at least 11.4 terawatt hours (TWh) – or 5.7 Mt of coal.
- Wood Mackenzie anticipates that Ukraine could make up for this shortfall in power generation by: diverting greater domestic coal resources (an extra 1.5 Mt for 3.1 TWh); increasing coal imports to the power sector (1.8 Mt for 4.9 TWh); reducing electricity exports to neighbouring markets (1.4 TWh); and boosting nuclear output (2.1 TWh). Already, a deal has been cemented with a South African supplier for 1 Mt of import coal for the winter months.
- The pressure that a higher coal import bill and less revenue from electricity exports will put on Ukraine’s already strained finances remains a concern. To date much of the attention around Ukraine’s energy mix has been focused on gas, however, its use as a replacement fuel is limited by government policy restricting consumption in light of the disruption of Russian gas imports and by a lack of flexible gas-fired power capacity.
- In order for Ukraine to meet its electricity demand through winter 2014/15, a recovery in coal production coupled with a higher volume of coal imports will be critical. However, significant downside risks remain to this outlook: damage to coal production could be greater than we project, requiring total imports to rise to 5 Mt for the winter months (five times last winter’s volume); a tighter domestic power supply-demand balance further threatens the power supply security of Ukraine’s neighbours; and a cold winter combined with any of these risks would create a severe situation for Ukraine. (
