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.
2 Key sectors of the
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 1263 billion (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 Technology bottlenecks were addressed and to a certain extent outdated technology was replaced by modern equipment.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 22 areas with approximately 120 different deposits. The existing reserves are currently around 160 bn t, 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 60 active underground mines and 55 open pit mines. The open pit mines produce 90 % of the lignite and 65 % of the hard coal. With its total of 439 million 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, 345 Mta were thermal coal (hard coal and lignite) and 94 Mta were metallurgical coke (coking 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 113.8 Mta, meaning a market share of 25 % in 2018. 55.4 Mta of its production volume went to the domestic market, while 58.4 Mta were exported (40 % market share in Russia). SUEK owns 27 active coal mining operations distributed across 9 regions of the country (Fig. 6). More than 70 % of the production volume was produced by the open pit method. 42 Mta of the mined coal went through one of the company’s 9 washing plants. In this way, SUEK produced over 80 % of its high-quality export coal in 2018. In addition, the company also owns 10.9 GW of power generation capacity in Russia. 3 modern 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.
2.2 Iron ore
Iron ore production is dominated by the five companies Metalloinvest, Severstal, Evraz, NLMK and MMK. The market leader is Metalloinvest, which has 14 bn t of proven reserves and an estimated 138-year lifespan in the two mines Lebedinsky GOK and Mikhailovsky GOK. In 2018, Metalloinvest produced 40.4 Mta of iron ore, after 39.5 Mta in 2015. With a pellet production (Fig. 8) of 27.7 Mta, the company is the global number 2 behind Vale (55.3 Mta). Metalloinvest also produced 7.8 Mta 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 5.1 Mta 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 17.4 Mta 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 20 Mta by 2022. NLMK plans to increase its iron ore capacity from 13.9 Mta in 2013 to 17.9 Mta in 2017. The next place in the ranking is taken by Severstal with a production volume of 16.4 Mta of iron ore pellets from its two mines Karelsky Okatysh and Olkon. It is followed by Evraz, whose iron ore production fell to 13.5 Mta in 2018, after 13.7 Mta in 2017. Evraz produced 11.1 Mta 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.
Norilsk Nickel’s mining output in Russia comes from the 4 mines of the Polar Division on the Taimyr peninsula north of the Arctic Circle and from 2 mine complexes with open pit and underground mines on the Kola Peninsula. It mined approximately 17.3 Mta of ore in the Polar Division in 2018, and 7.9 Mta 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 – 0.28 Mta of nickel, 0.52 – 0.56 Mta of copper and 160 – 205 t 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 40 companies with annual sales of several billion US$. In the base metal sector, UMMC owns 8 mine 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 5 mines in Russia, of which the Mikheevsky GOK mine is the largest with a capacity of 18 Mta of ore. Another mine with a similarly large capacity of 0.5 Mta 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 3347 t of gold was extracted from mines in 2018, after 3320 t 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 651 t of gold to their reserves in 2018. Russia has a production volume of 297.3 t, giving it a global share of 9 % and 3rd place 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 30 companies in Russia. An overview of the TOP 5 is provided in Fig. 14. The TOP 5 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 69.2 t (2440 koz) in 2018 and 61.2 t in 2017. On an international scale, Polyus comes 5th behind Newmont, Barrick Gold, AngloGold Ashanti and Kinross Gold. Polyus owns the 6 mines 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 38.0 Mta ore was extracted for the production of gold (Fig. 16) after 22.5 Mta 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 1.7 g/t. The average mine lifespan is 26 years, making Polyus the industry leader in this respect.
In 2nd place in the ranking follows Polymetal with a market share of 15 % and a production output of 44.3 t (GE = Gold Equivalent) in 2018. The company owns 8 ore mines in Russia (Fig. 17) and an iron mine in Kazakhstan and produced 1216 koz of gold, 25.3 moz of silver, 3.9 kt of copper and 5.4 kt of zinc in 2018. Kinross takes 3rd place in the ranking with a production output of 13.9 t or 490 koz GE 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 87.2 t in 2018 out of an overall total of 297.3 t.
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 4.3 million carats to 154 million carats compared to 158 million carats in the previous year. In contrast, the value of rough diamond production rose to US$ 17.4 bn in 2018, an increase of US$ 0.5 bn over the previous year. Russia was able to maintain its market share of 27 % with a volume of 43 million 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 TOP 7 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 top 5 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 TOP 5 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$ 17 bn, the value of cut diamonds is US$ 26 bn. 90 % of the processing of cut diamonds takes place in India. The annual value of jewelry diamonds is estimated to be around US$ 80 bn .
In 2018, Alrosa was the world’s number one diamond producer with 36.7 million 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 628 million carats, which will allow diamond extraction for about the next 17 years. On average, the ratio of diamonds to ore is 0.91 carat. The company operates a total of 11 diamond mines in the Republic of Yakutia and in the Arkhangelsk region (Fig. 18), of which 8 are surface mines and 3 are underground, as well as owning numerous other alluvial deposits. On an international scale, Alrosa owns 5 of the 10 most 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.
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 1.5 bn to US$ 3.5 to 4.0 bn. Norilsk does not plan to again reduce its CapEx to below US$ 2.0 bn 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.