Ukraine’s DTEK Plans to Sell Coal to China as the Economy Slows

DTEK, Ukraine’s largest private coal and power producer, hopes to expand coal sales to China as the world’s second-largest economy slows and demand declines.

“We are looking at China because we know it is a driver of the world economy and the health of the Chinese economy is correspondingly the health of the world economy and health of our demand.” said Yuriy Ryzhenkov, DTEK chief operations officer, in an interview in Kiev on Sept. 26. “The biggest concern is the situation with the Chinese economy, that the economic crisis is just starting and it is going to roll in.”

China’s economy expanded at a three-year low of 7.6 percent in the second quarter and this year it is estimated to have the slowest economic growth in 22 years. Ukraine’s economy, dependent on export of steel and chemicals, slowed to 1.5 percent in the first eight months of the year from 2 percent in the first seven as the construction industry shrank.

DTEK’s coal exports fell 21.6 percent to 1.46 million tons in the first half, after rising an annual 73 percent to 3.4 million metric tons the the full last year. Coal exports are estimated to decline this year, Ryzhenkov said, adding that coal output in 2012 will probably exceed 3 million metric tons. The company ships coal to Turkey and other countries in Europe and Africa and also plans to sell to Brazil this year, it said.

“We are looking at the possibility to supply resources to China, especially coal, probably anthracite, which is in great demand in the Chinese market,” Ryzhenkov said. “We already purchased some equipment from China and signed strategic partnership agreements with some companies. We are also looking at other possible partners.”

Sustain the Trend

Kiev-based DTEK is interested in coal mining equipment deliveries from China, he said. The company had an 11.2 percent increase in net income in the first half of the year helped by acquisitions in late 2011 and 2012, and wants to “sustain the trend” to the end of the year, Ryzhenkov said without elaborating.

DTEK, which is owned by Ukraine’s richest man Rinat Akhmetov, bought stakes in six power generating and distributing companies and a coal mine in the Donetsk region in government auctions held since November 2011.

“We see signs in the market that the economy is weakening,” he said adding that it may affect year-end results. “We already see it weakening in the prices of coal and electricity in the world.”

DTEK’s year-end electricity export volumes are estimated to increase around two-fold from 2011, Ryzhenkov said. The company is now shifting from acquisitions to making its assets “more efficient and at world-class level” and seeks to overhaul 24 generating units in three years, according to Ryzhenkov.

New Blocs

“We cannot really wait any longer,” he said. “The Ukrainian power-generating capacity is decaying and now is the time to either start building new blocs or overhauling the old ones. Our feeling is that consumers are still not ready to pay for the new blocks.”

DTEK plans to refinance about 23 percent of its debt portfolio over the next twelve months, Ryzhenkov said. It includes the company’s outstanding debt of $354 million for this year and $56 million for 2013, he said.

The company is “confident” about managing its currency risks, Ryzhenkov said. Export sales generate 10 percent of DTEK’s revenues and its debt is about three quarters in dollars and euro.

“Ukraine is still a net importer of energy resources, which means that once the currency changes its exchange rate, within four to six months the prices will adjust,” he said. “As long as we can cover current debt service and wait for the price to readjust we don’t feel the problem of managing risk.‘‘

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