1 Introduction
The political and economic instability, the situation in Ukraine, current developments regarding the imposed sanctions and the uncertainty and volatility of the financial and commercial markets are certainly having an impact on the Russian economy. Nowhere is this more evident than in the controversial North Stream2 project (Fig.1). The USA is imposing sanctions in an effort to stop the construction of the gas pipeline through the Baltic Sea from Russia to Germany shortly before its completion. Germany and a number of other European countries remain committed to the project in order to ensure European energy independence. By contrast, the Americans regard the project as a danger for energy security in Europe. However, in Europe this viewpoint is rather seen as a pretext covering the real motive of supplying Europe with US American liquefied gas.
The Russian economy has developed better than expected in recent years and the prospects for the coming years are rated as generally good. Fig.2 shows the forecasts of real GDP growth for Russia and for other economic zones according to the IMF (International Monetary Fund), compared to data published by the Russian Ministry for Economic Development and Trade. For 2019, the IMF expected a 1.1 % growth rate for Russia. The VAT hike in January of that year acted as an impediment to growth. 1.8 % growth is forecast for 2020 and 2.0 % for the years up to 2024. Russian authorities expect an increase of 1.3 % for 2019. They prognosticate a GDP growth of 1.7 % in 2020, after which 3.1 % are planned in 2021, 3.2 % in 2022 and 3.3 % in 2023 and 2024 respectively. However, a longer-lasting recession in the global economy could have an inhibiting effect.
The Russian government plans a massive improvement in infrastructure, which could permanently change the largest country in the world. By 2014, they plan to channel the equivalent of more than €80billion into 11federal projects, 9of which concern the transport sector and 2of which concern the energy sector. The national development plan adopted at the end of 2018 comprises a total of 690individual projects. The envisaged development of hubs for logistics and transport will ensure better interconnection of the country’s conurbations. The “Eurasia” railway line, which is part of the Chinese “One Belt, One Road” project, is to connect Beijing and Berlin with a journey time of 40hours by 2027. The Russian state railway company expects passenger and freight volumes of 37million passengers and about 150million tons of freight per year by 2050. Improvement of domestic aviation and shipping routes is also on the agenda.
2 Key sectors of the
mining industry
Russia is one of the richest countries in terms of mineral resources [1;2]. Almost all important mineral resources are mined: base and precious metals, coal, iron ore, bauxite and diamonds. Fig.3 shows Russia’s share in the worldwide production of important commodities. In particular, the country plays a leading role in the mining of platinum group metals and diamonds. Russia’s share of the world’s reserves of important commodities is depicted in Fig.4. Russia is the undisputed leader in the production of rough diamonds. In the case of coal, the country has 15 % of the world’s reserves and 2ndplace in the international ranking after the USA. In platinum group metals, it takes 2ndplace behind South Africa. In the global ranking for iron ore, gold and lead, Russia achieves a good 3rdplace and is also among the world leaders for nickel, copper, cobalt and rare earths.
The Russian mining industry has developed positively in recent years. This is evident from its share in the country’s GDP gross value added (Fig.5). From 2003 to 2019, the quarterly average for the share of the mining industry in the GDP was 1263billion (bn) rubles. The fourth quarter of each year was usually below average due to the early onset of harsh winters. But there is no trace of slumps due to economic sanctions. On the contrary, the fall in value of the Ruble has rather had the effect of boosting the competitiveness of the Russian mining industry. The reduced imports of machines due to the sanctions resulted in a strengthening of the domestic supplier industry. Technology bottlenecks were addressed and to a certain extent outdated technology was replaced by modern equipment.
2.1 The coal industry
Russia’s coal deposits span 22areas with approximately 120different deposits. The existing reserves are currently around 160bnt, 43.4 % of which relates to hard coal and anthracite and 56.5 % relates to sub-bituminous coal and lignite. In the present mining areas there are more than 60active underground mines and 55open pit mines. The open pit mines produce 90 % of the lignite and 65 % of the hard coal. With its total of 439million tonnes per year (Mta) in 2018, Russia was the sixth largest coal producer behind China, the United States, India, Australia and Indonesia. Of this amount, 345Mta were thermal coal (hard coal and lignite) and 94Mta were metallurgical co*ke (co*king coal). In 2018, coal production increased by 7.6 % compared to 2017. Russia is the world’s third largest exporter of hard coal, after Australia and Indonesia.
Coal mining in Russia is entirely in the hands of private companies. The market leader is SUEK (Siberian Coal Energy Company) with coal sales of 113.8Mta, meaning a market share of 25 % in 2018. 55.4Mta of its production volume went to the domestic market, while 58.4Mta were exported (40 % market share in Russia). SUEK owns 27active coal mining operations distributed across 9regions of the country (Fig.6). More than 70 % of the production volume was produced by the open pit method. 42Mta of the mined coal went through one of the company’s 9washing plants. In this way, SUEK produced over 80 % of its high-quality export coal in 2018. In addition, the company also owns 10.9GW of power generation capacity in Russia. 3modern ports are available for coal exports. These are the Vanino Bulk Terminal on the coast opposite Japan, the Murmansk Commercial Seaport and the Maly Port near Vostochny on the east coast.
Second place in the ranking is occupied by KRU (Kuzbassrazrezugol), which belongs to the UMMC (Uran Mining and Metallurgical Company). Most recently, KRU’s output was 52.7Mta. All of this coal comes from the Kuzbass region, where the company operates 16coal mines. Except for the Baykaimskaya mine, they are all open pit mines (Fig.7). 90 % of the mining output goes through coal processing and washing plants. 67 % of the coal produced by KRU is exported. The next 3places in the ranking are taken by SDS-Ugol with 7 % market share, then Mechel and the Evraz Group with 5 % each. Mechel is Russia’s leading metallurgical co*ke producer, controlling over 25 % of the co*king coal washing capacity. In addition to its coal mining operations, Mechel is active in the extraction of iron ore and in ore smelting. co*king coal is also produced by the Evraz steel company, which owns the Raspadskaya and Yushkuzbassugol mines. In 2018, Evraz produced 24.2Mta of co*king coal there.
Due to the increasing demand for thermal coal, especially in the Far East, Russia will continue to expand its production volumes and infrastructure. This is favoured by the fact that over 90 % of the reserves are located in Siberia and the Far East regions. In 2018 alone, 60 % of coal production was mined in the Kuzbass region. The markets in Japan, Korea and Taiwan primarily demand high-quality boiler coals with calorific values of 5600kcal and higher. As long ago as 2014, the government launched a programme for the “Development of the coal industry in the Russian Federation up to 2030”. The Russian energy minister announced an ambitious goal at the end of last year, namely to double exports to Asia to 200Mta. The plans of the large coal companies therefore all provide for capacity expansions.
2.2 Iron ore
In 2018, Russia produced 71.7Mta of pig iron, which corresponds to 6th place in the global ranking behind China, India, Japan, the USA and South Korea. In terms of steel exports, Russia’s 33.3Mta makes it the global number 3behind China and Japan. With around 95Mta, Russia is the fifth largest producer of iron ore after Australia, Brazil, China and India. It is suspected that Russia holds around 15 % of the world’s reserves of iron ore, i.e. 25bnt. Regarding the iron content, only the reserves in Australia and Brazil are richer. For many years, the main mining area has been the Kursk Magnetic Anomaly (KMA) in the west of the European part of the country, where resources of 200bnt are suspected, with iron ore contents of between 35and 60 %.
Iron ore production is dominated by the five companies Metalloinvest, Severstal, Evraz, NLMK and MMK. The market leader is Metalloinvest, which has 14bnt of proven reserves and an estimated 138-year lifespan in the two mines Lebedinsky GOK and Mikhailovsky GOK. In 2018, Metalloinvest produced 40.4Mta of iron ore, after 39.5Mta in 2015. With a pellet production (Fig.8) of 27.7Mta, the company is the global number 2 behind Vale (55.3Mta). Metalloinvest also produced 7.8Mta of HBI/DRI (Hot-Briquetted Iron/Direct Reduced Iron) products, for which it is the only Russian manufacturer. Metalloinvest includes the steel manufacturers OEMK and Ural Steel, which had a steel production output of 5.1Mta in 2018. The production portfolio has shifted from iron ore (43 % in 2012) to pellets (56 % in 2019) and HBI/DRI products (17 %), with currently only 27 % iron ore.
Second place in the production of iron ore is occupied by NMLK (Novolipetsk), the largest steel producer in Russia, with a market share of 24.3 % or 17.4Mta of iron ore concentrate. NMLK is able to supply its pig iron production entirely with iron ore from its own mines (Fig.9). Concentrate production is to be increased to 20Mta by 2022. NLMK plans to increase its iron ore capacity from 13.9Mta in 2013 to 17.9Mta in 2017. The next place in the ranking is taken by Severstal with a production volume of 16.4Mta of iron ore pellets from its two mines Karelsky Okatysh and Olkon. It is followed by Evraz, whose iron ore production fell to 13.5Mta in 2018, after 13.7Mta in 2017. Evraz produced 11.1Mta of pig iron in 2018. It achieved 79 % self-sufficiency with iron ore (Fig.10). Other important iron ore producers are the Swiss Eurochem, Mechel and MMK (Magnitogorsk Iron& Steel Works).
2.3 Base metals and platinum group metals
Russia is particularly rich in the base metals nickel, lead, copper, zinc and vanadium, as well as the platinum group metals (PGM) platinum and palladium. The markets for these metals have recently picked up again. The price of palladium has exploded; since the beginning of 2019, it has risen 50 % to US$1937/oz. Now it is expected to hit the US$2000/oz mark. Palladium is thus far and away the most expensive precious metal. The most important customers for palladium are North America (28 %), China (23 %), the EU (22 %) and Japan (13 %). For platinum, the main customers are China (29 %), the EU (26 %), North America (14 %) and Japan. Most of the copper goes to China (50 %) and the USA (8 %), while nickel is mostly taken by China (52 %) and the rest of Asia (25 %). Driving the demand for the above metals are the stainless steel sector, the automotive industry and the battery manufacturing sector.
With a production volume of 0.158Mta in 2018 in Russia and 0.219Mta worldwide, giving it a market share of 13.7 % of the global production volume, Norilsk Nickel is the largest nickel producer. In addition to nickel, the company mined 0.436Mta of copper in Russia in 2018. Its production output of platinum was 642koz (kilo ounce) and that of palladium was 2671koz. While it only has a global market share of 1.5 % for copper, the company is number 3for platinum with a market share of 10.7 %, behind Anglo American Platinum (19 %) and Impala Platinum (11 %). For palladium, Norilsk Nickel is the clear number1 with a global market share of 40 % (Fig.11). The other front places are taken by Anglo American Platinum and Impala Platinum. In addition to the above Metals, Norilsk produces nickel cobalt, rhodium, iridium, ruthenium and others.
Norilsk Nickel’s mining output in Russia comes from the 4mines of the Polar Division on the Taimyr peninsula north of the Arctic Circle and from 2mine complexes with open pit and underground mines on the Kola Peninsula. It mined approximately 17.3Mta of ore in the Polar Division in 2018, and 7.9Mta ore at Kola MMC. The ore enrichment takes place in the Talnakh and Norilsk plants. Fig.12 shows how the company has been able to increase its production volume (as a nickel unit price equivalent based on the first half of 2017) and has thereby been able to reduce its specific production costs. Norilsk Nickel plans to continuously expand production. By 2030, it intends to produce 0.25–0.28Mta of nickel, 0.52–0.56Mta of copper and 160–205t of platinum and palladium in Russia. This corresponds to production increases of 15–20 % for nickel, 20–40 % for copper and 30–95 % for platinum and palladium. The sulfur emissions from the smelters are to be drastically reduced. For the company’s Polar Division, a decrease of 95 % is targeted up to 2030.
The other major mining companies for the extraction of copper, lead and zinc are UMMC (Ural Mining and Metallurgical Company) and RMK (Russian Copper Company). UMMC comprises 40companies with annual sales of several billion US$. In the base metal sector, UMMC owns 8mine complexes, whose products include gold, silver, copper (Fig.13), lead and zinc. Just like Norilsk Nickel, the company has a worldwide market share of 1.5 % for copper. In the case of zinc, UMMC has a 2 % market share. RMK owns 5mines in Russia, of which the Mikheevsky GOK mine is the largest with a capacity of 18Mta of ore. Another mine with a similarly large capacity of 0.5Mta of copper concentrate is under development in collaboration with Tominsky GOK. In 2018, RMK generated almost 20 % of Russia’s copper production. Other leading companies in the sector are Polymetal, Metalloinvest and Russian Platinum.
2.4 Gold mining
According to the World Gold Council, a worldwide total of 3347t of gold was extracted from mines in 2018, after 3320t in 2017. This is an increase of 1 %. The prospects for gold are interesting, also because there is currently a lack of other attractive investment opportunities. National central banks alone added around 651t of gold to their reserves in 2018. Russia has a production volume of 297.3t, giving it a global share of 9 % and 3rdplace behind China and Australia. While some TOP countries suffered reductions in their production volumes, Russian gold mining volumes rose by a remarkable 10 % in 2018. The gold mining sector comprises more than 30companies in Russia. An overview of the TOP5 is provided in Fig.14. The TOP5 account for approximately 52 % of the country’s production volume.
The leading company is Polyus Gold with a share of 23 % or a production output of 69.2t (2440koz) in 2018 and 61.2t in 2017. On an international scale, Polyus comes 5th behind Newmont, Barrick Gold, AngloGold Ashanti and Kinross Gold. Polyus owns the 6mines Olimpiada, Blagodatnoye, Verninskoye, Kuranakh, Alluvial and Natalka (Fig.15), with the Olimpiada mine providing almost 54 % of the production volume in 2018. In 2018, around 38.0Mta ore was extracted for the production of gold (Fig.16) after 22.5Mta in 2013, which means an increase of 69 %. The amount of produced gold rose by only 48 %, which clearly shows that Polyus is also affected by declining gold contents in the ore. The average gold content of the ore is currently 1.7g/t. The average mine lifespan is 26years, making Polyus the industry leader in this respect.
In 2ndplace in the ranking follows Polymetal with a market share of 15 % and a production output of 44.3t (GE= Gold Equivalent) in 2018. The company owns 8ore mines in Russia (Fig.17) and an iron mine in Kazakhstan and produced 1216koz of gold, 25.3moz of silver, 3.9kt of copper and 5.4kt of zinc in 2018. Kinross takes 3rdplace in the ranking with a production output of 13.9t or 490kozGE of gold in Russia, closely followed by the UGC Group (Uzhuralzoloto) and Petropavlovsk. Kinross holds majority rights in Chukotka Mining’s Kupol-Dvoinoye mine. The remaining places are taken by companies with less than 4 % market share. These include Nordgold, Highland Gold, Vysochaisky, Susmanzoloto and Sovrudnik. The group of these other companies produced a total of 87.2t in 2018 out of an overall total of 297.3t.
2.5 Diamond mining
The global production of rough diamonds has been declining in recent years. The reason is the depletion of important production mines. In 2018, according to De Beers Group’s “The Diamond Insight Report 2019”, output fell by 4.3million carats to 154million carats compared to 158million carats in the previous year. In contrast, the value of rough diamond production rose to US$17.4bn in 2018, an increase of US$0.5bn over the previous year. Russia was able to maintain its market share of 27 % with a volume of 43million carats, despite declining production, ranking ahead of Botswana, which achieved 16 %. The other major producing countries in 2018 were Canada, DR Congo, Australia, Angola and South Africa. Overall, the TOP7 countries account for around 91 % of the production output. Botswana, Canada and Angola have recently been able to increase their production volumes slightly, while volumes in the DR Congo, Australia and South Africa have decreased along with Russia.
The world’s top5 diamond producers in terms of sales are De Beers with 34.5 %, Alrosa of Russia with 26 %, and then Rio Tinto, Petra Diamonds and Gem Diamonds in the other places. In terms of volumes, Alrosa just achieves the leading position with 25 %, ahead of De Beers (24 %), Rio Tinto (12 %), Cataoca (6 %) and Petra Diamonds (3 %). Taken together, all the other companies have a total share of 30 %, i.e. the TOP5 have a 70 % market share. It is interesting to look at the value chain in the diamond industry. While rough diamond production “only” has a value of US$17bn, the value of cut diamonds is US$26bn. 90 % of the processing of cut diamonds takes place in India. The annual value of jewelry diamonds is estimated to be around US$80bn [3].
In 2018, Alrosa was the world’s number one diamond producer with 36.7million carats. In Russia Alrosa accounts for almost 90 % of the production output and thus has practically a monopoly position. The company’s proven reserves are 628million carats, which will allow diamond extraction for about the next 17years. On average, the ratio of diamonds to ore is 0.91carat. The company operates a total of 11diamond mines in the Republic of Yakutia and in the Arkhangelsk region (Fig.18), of which 8are surface mines and 3are underground, as well as owning numerous other alluvial deposits. On an international scale, Alrosa owns 5of the 10most important diamond mines, with the Jubilee, Nyurbinskaya and Almazy mines currently delivering the largest outputs. Recently, the two mines Mir and Udachny, which had been working as open pit mines since the 1950s, were converted to underground operation.
In the next 5years, Alrosa intends to particularly expand 4of its mines in order to compensate for the reduced production outputs of its Jubilee and International mines (Fig.19). Verkhne-Munskoye and the Nyurba Division are each expected to deliver +2million carats in 2020, the Udachny underground mine is expected to produce +3million carats by 2021 and finally, Severalmaz will extract an additional 1.8million carats by 2022. The funds for this have been approved. The Russian state holds a 43.93 % stake in Alrosa, while the Republic of Yakutia owns 25 % and the remaining 23.07 % are owned by diverse shareholders. Alrosa also has a 32.8 % holding in the Catoca Mining Company in Angola. A further diamond mining company in Russia is AGD Diamonds, which operates the Grib diamond mine located approximately 130km northwest of Arkhangelsk. In 2018, almost 5million carats were mined there.
3 Prospects
The future of the Russian mining industry is geared towards further investments. These are practically always aimed at two goals: an increase in throughput and an improvement in the metal extraction yield or, in the case of coal mining, improved qualities. If one takes the flagship company Norilsk Nickel as an example, it becomes clear what investment magnitudes are involved. For the next 5-year cycle, the company is going to increase its annual investments from the current US$1.3 to 1.5bn to US$3.5 to 4.0bn. Norilsk does not plan to again reduce its CapEx to below US$2.0bn until after 2026. The current upkeep of sanctions against Russia is obviously not playing a significant role in these considerations, since domestic suppliers are increasingly being used to make the necessary technological leaps. Western providers often lose out as long as the sanctions are maintained.
