•Recent economic impact on Russian steel-makers •Analysis of exports from Russia to the EU and Asia-Pacific, and a look at the recent shift of export quantities between the two regions •The effect of transport infrastructure, including seaports and rail, and hydrocarbon pipelines on the Russian coal market •Thermal coal consolidation among energy operators – what is the outlook? By Alexander A. Ignatov, President / Senior Partner, IGNATOV & COMPANY GROUP, Russia

1. BRAVE NEW WORLD
FOR A SLEEPING GIANT
> Russia on a threshold of
APAC coal export

2. KNOCKIN’ ON HEAVEN’S DOOR
> In 2009 Russia increased its coal export to Asia-
Pacific (APAC) by 50% to 2008
> Russia’s coal export decreased in “traditional”
markets – EU and CIS
> Such change in export destinations may be
either “accidental” event or a fundamental shift
> Current presentation analyzes such shift and its
2 background

3. Ad Astra Per Aspera
Russia’s Coal Market in the Restless 2000s
Loss of low-
cost
advantages
Growth of
Continuing
surface mining
business
vs.
concentration
underground
Move to Soviet- Trends Decline of
time
production 2000- lignite
2009 production
volume
In addition to several “basic” trends (that started at the beginning of the
2000s) years 2008-2009 have brought few new trends; “basic trends” to
be analyzed in a context of their influence over APAC export
3

4. Great Expectations
New Trends That May Change the Industry
Export
Sales
EU-APAC Growth
Export
Shift
Coal
Wars
2.0
Instable Equilibrium
In a current presentation we pay our main attention to one of those new
trends – EU-APAC shift in Russia’s coal export; and again – other new
trends to be analyzed in a context of their impact over that export shift 4

5. Export as Survival Kit
Export Grew Absolutely & Relatively
Hard period persuaded business participants to re-evaluate their sale
strategies – paying extra attention to export; contrasting home sales the
export demonstrated 2.6% progress – from 95.6 mt in 2008 to 98.1 mt
in 2009. But increasing their export Russia’s coalminers met another
challenge… 5

6. EU Moralists vs. APAC Pragmatists
Coal Export Shift Has Occurred in 2009
Prior to 2009 Russia’s coal export was oriented mainly EU – with 73.4% share. But
following market drop in Europe the western route of Russian coal export became
less and less attractive. Export to CIS shrunk by 36% in 2009. Meanwhile the
demand in APAC continued to grow – even in crisis period; 2009 became the time
when several Russian coal tycoons began to shift export interests from EU to Asia-
Pacific. In total Russia exported 50% more coal to Asia-Pacific in 10m2009 (14.8 mt)
than in 10m2008 6

7. Brave New World?
Fundamental Shift or Temporary Replacement?
Scenarios for Russia’s Coal
Export as Survival Kit
Home, (export sales drive the mining)
Sweet
Home
(domestic
demand drives Friends Will Brave New
the mining) Be Friends World
(restoration of EU (fundamental shift
& CIS export) to APAC)
Russia’s coalmining may go one of two “strategic” ways – either to
support growing domestic demand or to develop export trade; two
options are possible in the export scenario – a fundamental shift from EU
to APAC or restoration of the European focus 7

8. Doom for Domestic Boom?
Shrinking in Domestic Sales Stimulates Export
Global economic shrinking pressed down the Russian steel-makers – and
their demand in coking coal respectively; in 10m2009 they used 30.7 mt of
coking coal (fig. 3) vs. 35 mt in 10m2008 (12% drop). Thermal coal
consumption felt by 7% - from 155 mt in 10m2008 to 132 mt in 10m2009.
8

9. Instable Equilibrium
Who Will Ride – Domestic Demand or Export?
In 1998-2008 export and
domestic demand regularly
replaced each other as main
driver for coal production
growth – with four-year
periodicity
2009-2010 crisis has broken
the harmony – causing
instability and pushing the
market to a “bifurcation point”
The market may go one of
three ways:
-To continue “harmonic
fluctuations”, maybe with
another period
-Domestic demand will push a
production growth for next
decade
-Export will become
constantly dominating driver
for growth
9

10. TO AWAKEN A SLEEPING GIANT
> APAC market provides excellent opportunities to
Russia’s coal export – both in terms of volume and
transportation routes
> Russia’s current share in APAC coal export in 3%
doesn’t correspond the country’s potential
10

11. The House Of The Rising Sun
APAC Coal Import
Coal import (in mln MT) with APAC countries
11

12. The Sleeper Must Awaken
Russia’s Share in APAC Coal Trade May Grow
Currently Russia holds about 3%
in APAC coal export – far behind
the market leaders, Australia and
Indonesia
Intensive
growth
Extensive
growth
Russia may either follow APAC
demand growth (extensive way)
or increase it’s share in APAC
market, competing with Australia
and Indonesia in their
“traditional” niches
12

13. For Club Members Only
Eastern Russia as a Coal Source for APAC
13

14. FIGHT CLUB
> There are few large miners in Russia – comparable in size with the
leaders in Australia and Indonesia – who may effectively provide
coal export in APAC
> Currently they have less export capabilities in coking coal, as it’s
primarily used for supplying affiliated steel mills
> The level of “self-supply” is much lower in thermal coal, and thus
it’s possible to increase its export; however the mutual interest of
energy operators and coalminers may lead to the same situation as
in a coking segment – most of coal to be used for self-supply
> Any case, the Russian miners need to launch new start-ups in the
eastern part of the country to support APAC growing export
14 > It’s hard to do without intensive foreign investments

15. On the Shoulders of Giants
Who Are the Potential Exporters
Currently 20 leaders provide 90% of Russia’s coal production – with SUEK
providing 38% in thermal coal production and Evraz Group 31% in coking coal.
The main questions are a) do they have sufficient mines in Eastern Russia? b)
do they have surplus of coal for export (over self-supply volumes)?
15

16. Oligopoly vs. Self-Supply
Two Suppliers in Thermal vs. Self-Supply in Coking
In pre-crisis period the picture was quite clear in Russian coal market: leading
steel-makers, such as Severstal or Evraz, owned big coking coal mines and
bought most of their coal; 82% of coking coal was consumed internally while
only 18% was exported. Russian energy operators utilized 66% of thermal coal
– with SUEK and Kuzbassrazrezugol holding together 58% in supply; smaller
mines – not protected by long-term contracts with energy operators – preferred
to export thermal coal by spot prices.
16

17. Coal Wars 1.0: The Winners
What Did Steel-Makers Fight For?
The diagram shows the competitive positions of Russia’s leading steel makers in
terms of their supply of coking coal. The x-axis shows the annual demand in coking
coal by each of the major players (million t), and the y-axis shows the self-supply,
defined as “coking coal supply with affiliated mines in % to coal demand with steel
mill.” Evraz, Severstal and Mechel currently completely self-supply their steel mills
with coking coal; MMK self-supplies about 50% of the required coal (deliveries with
Belon), while 50% is being procured from non-affiliates; NLMK (after it sold
Prokopyevskugol in 2007) and Metalloinvest currently have no affiliated mines. 17

18. Self-Supply is a Mantra
Who Has Free Volumes Over Self-Supply?
Coal
Market
Miner with coal mining in Self- Large
Whom “free”
assets in Eastern supply, start-
supplies volume,
Eastern Russia Russia, mtpa ups
mtpa
mtpa
Mechel
Mechel Mining 25.9 3.8 22.1 Elga
Yakutskenergo
Evraz
Evraz’s steel
(Raspadskaya + 23.4 11.4 12.0 -
mills
Yuzhkuzbassugol
MMK (Belon) 4.9 9.8 MMK Steel Mill - -
TGK-12
SUEK 96.2 26.7 69.5 -
TGK-13
Novosibirskene
Kuzbassrazrezugol 50.0 6.5 43.5 -
rgo
Vostsibugol 13.5 12.0 Irkutskenergo 1.5 -
Most of the rest coalminers (working in Eastern Russia) have no steel or energy
affiliates – and thus they may either sell their coal domestically or export it in
any destination; of course such possibilities are limited with coal quality, mine
distance to the Pacific seaports, and obligations to local authorities
18

19. Back in the USSR
Is Coalmining Sufficient for Export Rise?
In 2008 Russia celebrated 20 years since its coalmining record level – in 1988 a
nation extracted 425 mt of total 467 mt produced in the USSR. Just in 10 years
production shrunk twice to 232 mt in 1998 – however privatization became the
turn out “magic wand” for the industry. As the result coal growth was
reinstated and in 2008 the country manufactured 329 mt; nevertheless in 2009
it was a decline
19

20. Do We Need Another Hero?
Foreign Investments for APAC Export
Each +1% in
+1 mtpa in projects
Russia’s share in
like Elga costs $70
APAC export equals
mln of investments
to +6-7 mtpa of coal
Consolidated net
So each +1% in
profit of all Russia’s
Russia’s share costs
coalminers (w/o
$450-500 mln of
steel) was about
investments
$500 mln in 2008
I.e. Russian
coalminers can Significant increase
finance only +1% in APAC coal export
per year in APAC is impossible w/o
export with own foreign investments
sources
20

21. WEAK LINK
> Rail transportation is a good option at coal export in
China and Korea
> However rail route has few serious limitations, like
insufficient number of border stations, lack of cars and
state-run monopoly in locomotives
> Marine transportation is more flexible and thus
private miners actively invest start-ups in the Pacific
> Rail-Seaport conjunction is still a “bottleneck”
21

22. Orient Express
Is the Rail Infrastructure Ready for Export?
• Rail conjunction with China and
Readiness North Korea
• Rail conjunction with actual
seaports in Pacific
• Shortage of rail stations in
Chinese border
• Gondola cars shortage
• No actual rail routes to new
Bottlenecks coal start-ups
• Limited capacity of paths to
seaports
• Limited capacity of BAM (due
to a 749 km single-track
segment)
Existing rail infrastructure in Russia’s Far East allows to start the export sales –
but it has few limitations that prevent fast increase of APAC export; to succeed
in APAC endeavor the coalminers have to resolve the issues together with RZD
22

23. Come Sail Away
Seaport Start-Ups to Support APAC Export
At Sept 2009 SUEK launched 12 mtpa Muchka bulk terminal in Vanino seaport; investing
$300 mln to a venture SUEK opened the window of opportunity for Russia’s coal export boost
to APAC up to 22-24 mtpa in the nearby future. Mechel Steel Group declared it would build a
coal terminal in Vanino – to support upcoming export from Elga deposit; SibUgleMet plans to
invest $100 mln and construct 8-12 mtpa coal terminal in Vladivostok area 23

24. NOTHING PERSONAL, JUST BUSINESS
> Few internal and external factors may become
“limiters” for Russia’s APAC export; they can’t stop it at
all – but may prevent its rapid growth
> Cost issues (like faster growth of salaries to
productivity or “cantering” rail tariffs) are the major
“internal” factors
> Probable coal wars in thermal segment may also
negatively impact the export
> If Ukraine renews coal import from Russia it’s hard to
avoid “temptation” to sell there, not to distant APAC
> New coal exporters (like Kazakhstan or Vietnam)
24 become active in APAC – so Russia has to compete
them too

25. Low-Cost Russia? Forget
Main Costs Grow Faster Than Efficiency
In 2000-2008 salaries grew much faster than labor productivity and coal
production; partially it was “compensated” with fast growth of coal prices
– but any case, coalmining in Russia became more and more costly,
eliminating low-cost advantages (to Western coalmining)
25

26. Coal Wars 2.0: On Threshold
Business Concentration in Thermal & Coking
Now the country enters a phase when energy operators (EO) begin to create their own
empires in thermal coal – and they have good chance for this, as business concentration
level is much lower than in coking segment; energy companies hold only 6.3% in
thermal coal production, SUEK and Kuzbassrazrezugol (due to their capitalization these
two will be hardly ever acquired with any energy operator) provide 58% of output, while
36% of thermal coal output is controlled with private investors, usually ready to sell
assets by good price. We may become the witnesses of new “Coal Wars”, no less violent
than at Oh-Oh decade dawn, when steel barons built their domains.
26

27. Brother’s Assistance
Ukraine May Increase Coal Import
Russia is the key source for coal import in Ukraine – with 80% share in import; in 2009
Russian coalmines delivered almost 6 mtpa of coal in Ukraine, while in 2008 this volume
was 10 mtpa (40% reducing was caused with demand shrinking in Ukraine).
Kazakhstan was another active importer of coal in Ukraine – and in 2009 its share even
grew. In 2008 IUD began to import coal from Australia and the US; after SCM bought
UCC’s coalmines it began the coal import from the US.
27

28. New Kids On The Block
Competition With New Exporters
Kazakhstan •Rail import to China
•Rail import to China
Mongolia •Rail import to Korea
• Rail and marine import to China
Vietnam • Marine import to India
• Marine import to Japan
• Marine import to Chinese Taibei
•Marine import to Japan
Colombia •Marine import to China
In addition to competition with APAC coal export Goliaths (Australia and
Indonesia) Russia will inevitably meet new rivals with aggressive
marketing strategy in the area
28

29. Long Way To Paradise
It’s Not So Easy To Follow Export Shift
Foreign
investments
Competition with Launch of new
market-holders mines in Eastern
and newcomers Russia
Marketing
Launch of new
infrastructure in
washing plants
APAC
Cost Resolving of rail
management “bottlenecks”
New seaport
capacities
To live in a Brave New World, a world of fast-growing and huge coal demand with APAC
economies, Russia’s miners have to pass a long and hard way: from finding sources for
the endeavor and launching new mines and washing plants in eastern part of the
country – to establishing of sale offices in major APAC countries and re-training sale
staff for work with Oriental buyers 29