CEO's statement

Growth through premium products and markets

Every year, SUEK progresses as a company. This is possible through the consistent implementation of our strategy, our focus on sales in high-margin markets, the increased production of washed coal with high calorific value, and the development of long-term partnerships and our own distribution network.

Vladimir Rashevsky Chief Executive Officer

A year of growth and achievement

After a few difficult years, during which low coal prices forced many producers to reduce capacity and work below the profitability line, 2017 was a year of stabilisation for the coal industry. Announced in 2016, the Chinese government’s measures to regulate its domestic market continued through 2017 and contributed to a favourable situation for producers and the international market. Indeed, rising prices and stable demand in premium markets enabled SUEK to increase revenues by 42% and EBITDA by over 50%.

For the Russian coal mining industry, 2017 marked the 70^th anniversary of the Miner’s Day, which SUEK honoured with new records. For the second year, we produced and sold over 100 million tonnes of coal. This achievement was made possible by the consistent implementation of our strategy, which aims to improve the efficiency of our production processes, taking into account the development of our logistics capacity, port infrastructure and washing facilities. It was also, of course, a result of the hard work and dedication of our people.

During 2017, our employees set 19 world productivity records. Labour productivity across our mining units increased by 9%, which highlighted the effectiveness of our operational efficiency improvements and the quality of our corporate qualification enhancement programmes.

In terms of exports, about a third of the company’s products were sold in high-margin markets. This was due to our increased production of washed coal with high-calorific value, which is currently in demand throughout the international markets. Other contributing factors were the development of long-term partnerships with key customers and the expansion of our own distribution network in Poland, China, Turkey and the Baltics. Overall, our export sales in 2017 grew by 9%.

We also increased sales in the domestic market. SUEK makes a significant contribution to ensuring Russia’s energy balance and security. Being the largest supplier of thermal coal in the country, today we meet about a third of the needs of domestic power plants, utilities and other key consumers.

Sustainable development and social responsibility

We are very aware of our responsibilities to the regions where we operate and their residents. We strive to minimise our impact on the environment by developing innovative and highly effective technologies. In 2017 SUEK adopted a new environmental strategy aimed at increasing the effectiveness of our activities in this field.

In addition, SUEK is the largest taxpayer and employer in a number of Russian regions, and through our regional policy we aim to improve the quality of life in mining towns and settlements and to create a comfortable social environment. Every year, SUEK rolls out about 150 social and charitable projects. In 2017, the company paid $310m to local, regional and federal budgets, and allocated additional $22m to charity projects.

Focus on premium markets and advanced technology

We are optimistic about the future, expecting a steady growth in demand for coal with high calorific value. Our conservative forecast for the next decade suggests an annual increase in the volume of global coal trading by an average of 0.8%. With an expected decrease in coal imports by China, the key growth drivers will come from countries in South and South-East Asia, such as Vietnam, the Philippines, Malaysia, Thailand, Taiwan, Pakistan and Bangladesh. There are prerequisites for resumed demand for imported coal in India, where domestic production output will not be enough to deliver new projects aimed at solving energy poverty problems.

We are also carefully assessing the prospects for increased coal demand due to the rapid development of electric vehicles. The growth of this market is likely to generate additional demand for electricity which can only be met by coal generation, especially in countries such as China and India, which are important sales markets for SUEK’s products.

Furthermore, we forecast higher consumption of thermal coal in Russia. This will be facilitated by industrial, energy and infrastructure projects in Siberia and the Far East. In total, the commissioning of new energy-intensive production facilities could result in a 10-14 million tonne increase in coal demand by 2027, although these estimates are conservative.

Our optimism regarding the future is based on careful coal market assessments, although more and less positive scenarios are of course possible. However, in recent years SUEK has demonstrated an ability to cope with both unfavourable market conditions and unprecedented attacks on the coal industry.

Throughout 2017, there was clear evidence to support the theory that most crises in the energy markets eventually come to an end, and that positive and negative fluctuations are common. We are confident that coal will remain a reliable, and in some cases the only available, source of electricity generation for many years to come. Our task is to continue our work, fulfilling our obligations to employees and partners, and in no case to rest on our laurels as we continue to adhere to the highest standards in all areas of our operations.