Russian mining industry shows signs of recovery

So, what is the state of the Russian mining sector today? That is connected to the state of the Russian, and the wider world, economies. Russia is still mired in a deep recession. In the first quarter of 2009, the economy contracted by 9.5% in year-on-year terms, with industrial output falling 15%. It is predicted that the country’s economy will shrink by 8.5% this year. Inflation reached almost 15% late last year, and this, along with concerns about major capital outflows from the country, caused the central bank to put up interest rates. As a result, inflation has come down a little (it is forecast to remain above 13% for much of this year) but the cost to many Russian companies of borrowing money has shot up from 8% to 25%. Also, the country has failed to develop its own financial markets, with the result that both major State- and private- sector-owned companies rely heavily on loans from foreign creditors, racking up almost USD500 billion in foreign debt.

The financial crisis in the wider Western world has almost closed the credit tap for Russian business. Although the Kremlin has injected massive amounts of money into the country’s banking system, loans are still difficult to obtain. There are reports that Russian companies have reverted to bartering to trade among themselves (a trading system that was common in the country during the 1990s).

Foreign investment continues to be hampered by a weak and unreliable legal system, political interference (often at local, not national, level), bureaucratic indifference, and corruption. In the latest World Bank survey on how easy it was to do business in countries, Russia was ranked at 120 out of 181 countries – Nigeria had a better ranking.
The country does, however, have foreign reserves of USD380-billion, carefully built up from oil revenues during the recent boom years, which gives it enough money to pull through the recession. And the country also has liberal business regulations and low taxes, which help local companies survive and make profits, despite the tough environment.

Further, the oil price has rebounded, to between USD60/bl and 70/bl, from an average of USD49/bl in the first half of the year. The Russian budget is predicated on an oil price of USD41/bl, and 90% of oil revenues above USD25/bl are taken by the State in taxes. Not only does the country remain heavily dependent on oil and gas, it is, if anything, more dependent on these hydrocarbons than it was at the turn of the millennium.

Russia is, geographically speaking, the largest country in the world, equivalent to 1.8 times the size of the US. Unsurprisingly, then, the country has a huge resources base. Back in 2003 (there does not appear to be a more recent published figure), the value of Russian explored mineral resources was estimated to be USD10 trillion and that of its unexplored resources at a minimum of USD200 trillion. However, many of these are in places that are hard to access or in deposits that are difficult to exploit. So far, some 20,000 mineral deposits have been explored. More than a third of these are now being mined or developed, but while these account for more than 70% of the country’s metals and minerals reserves, they encompass a mere 5% of Russia’s explored metals and mineral resources.

Russia reportedly hosts 33% of the world’s natural gas reserves, more than 10% of global oil reserves, 11% of world coal, and 26% of global iron-ore reserves. Other metals and minerals that the country possesses and produces include antimony, barite, bauxite, chrome, copper, fluorspar, gold, lead, magnesium, manganese, mercury, mica, molybdenum, rhenium, niobium, phosphates (including apatite), salt (sodium chloride), scandium, silver, strontium, talc, tantalum, tin, titanium, uranium, yttrium, zinc and zirconium.

There are believed to be some 130 mining companies active in Russia, a figure that includes foreign as well as Russian companies. Some of them are global majors, a group that comprises both private-sector and State-owned companies. Gazprom, the natural gas giant that holds 17% of the world’s, and more than 60% of Russia’s, natural gas reserves, is such a global major. Its shareholders were told on June 26,: “The global financial and economic crisis hasn’t bypassed Russia… Nevertheless… our company has again shown high reliability, stability, and potential for sustainable development… Crisis is a flexibility test.”

Russia’s largest oil company, Rosneft, is another leading State-owned minerals com- pany. Despite the recession, the company enjoyed excellent results for 2008 and was able to announce a dividend to shareholders that was 20% higher than the dividend for 2007. However, its net income for the first quarter of this year was 50.7% less than in the first quarter of 2008, although 165.8% more than in the last quarter of last year. Between the end of September 2007 and the end of March 2009, the company was able to reduce its net debt by more than USD8.5 billion, and it has recently signed a 20-year, USD15-billion loan agreement with China Development Bank.

Russia’s leading private-sector mining company Norilsk Nickel is the world’s number one producer of nickel (18.8% of global output) and palladium (46.3%) and is the fourth-gest producer of platinum (12%), while its share of world copper production is 2.7% (these figures are all 2007 estimates). Last year was the first in which the group made a loss. In terms of physical volumes of metals sold, the 2008 figure for copper was down 5% from 2007, that for palladium 7%, platinum by 18%, and gold by 15%. Still, Norilsk returned to profit during the first half of this year, and was on the acquisition trail again. 

Overall, the Russian mining industry is expected to contract again this year, although only slightly. From next year, it is forecast to return to growth, and consultancy MarketResearch.com expects the Russian mining industry to be worth USD175.8 billion in 2013.

(The above has been based on a survey by Reuters.)