Ukraine - Coal industry restructuring sector report

Report No. 15056-UA Ukraine Coal Industry Restructuring Sector Report March 4, 1996 Infrastructure Division Country Department IV Europe and Central Asia Region 44 k; ::; ha 'U r X@;  CURRENCY EQUIVALTS Currency unit - Karbovanets, abbrev. Krb US$1 - 150,000 Krb (as of August 1995) WEIGHTS AND NMASURES atm atmosphere bcm billion cubic meters Gcal Gigacalorie (10' cAi) GJ Gigajoub (10' 1) GW Gigajoule (10' W) kg kilogram km' square kilometer koe kilograms oil equivalent kWh kilowatt hour mt million metric tons MW Megawatt (10'W) PJ Petjoule (10"J) t metric ton tce ton of coal equivaent tum thousand cubic meters toe ton of oil equivalent TWh Terawatt hour (10"Wh) CALORMFC VALUES I Unit of Fuel Gcal Coal (ton) 5.0 Wood (solid m3) 1.8 Natural gas ('000m3) 8.1 Mazut (ton) 9.7 Diesel (ton) 10.2 Gasoline (ton) 10.5 Kerosene (ton) 10.3 Liquified Petroleum Gas (ton) 10.8 Cnude Oil (ton) 10.0 CONVERSION FACTORS I Gcal =4.187 GJ = 3.968 milion Btu - 1,163 kWh; I tce-7 Gcal; I toe-10 Gcal I kWh of hydro or imported electricity is converted to primary energy at 250 granm of oil equivalent. CHEMICAL COMPOUNDS NO, Nitrogen Oxides SO, Sulfur Dioxide ABBREVIATIONS CIS Community of Independem Sawes CHP Combined Heat and Power DONUGI Donetsk Coai Mining Researb Insute EBRD European Bank for Reconstruction and Development ECU European Currency Unit GDP Gross Domestic Product LPG Liquid Petroleum Gas Met Ministby of Coal Indusbty VAT Value-Added Tax FISCAL YEAR Januauy 1 - December 31  UKRAINE COAL INDUSTRY RESTRUCTURING CONTENTS EXECUTIVE SUMMARY ................................ i I. INTRODUCTION AND BACKGROUND ..................... 1 A. Introduction ....................................... 1 B. Past Development Policies .............................. 2 C. Environmental Performance ............................. 3 II. DOMESTIC COAL DEMAND AND EXPORT .............. 7 111. COAL PRODUCTION, IMPORT AND EMPLOYMENT .... ....... 12 A. Coal Mining ...................................... 12 B. Coal Washing ...................................... 17 C. Coal Import ....................................... 18 D. Employment, Wages and Benefits ......................... 19 IV. RESTRUCTURING OF THE COAL SECTOR .23 A. Current Institutional Arrangements .23 B. Coal Prices, Subsidies and Marketing .24 C. Uneconomic Mines .27 D. Corporatization and Development of Competition .29 V. IMPLEMENTATION OF THE RESTRUCTURING .... .......... 33 A. Preparation and Implementation of the Mine Closing Program ........ 33 B. Reduction of Surplus Labor ............................. 36 C. Divestiture of Social Assets ............................. 40 D. Investments ....................................... 41 E. Fiscal Impact of the Restructuring ......................... 44 APPENDIX Action Plan ANNEXES 1. Tables and Figures 2. Mine Closures in Great Britain 3. Divestiture of Social Assets and Liabilities MAP Domestic Energy Resources and Main Production Areas  ACKNOWLEDGEMENTS The report is based on the findings of a World Bank mission that visited Ukraine in May 1995 and again in September 1995 in response to a request from the Minister of Coal Industry. The members of the mission were 1. Dobozi (coal trade and demand), H. Hendriks (coal supply and investments), C. Husband (finance), W. Lane (environment), L. Lovei (mission leader), D. Merrick (corporatization), K. Skorik (energy statistics), and B. Weston (employment). The report greatly benefited from the work of a parallel mission preparing a Bank loan to mitigate the environmental and social effects of the closure of uneconomic mines. The members of that mission were J. Balkind (mission leader), P. Bodnar (social assets), P. Fortune (job creation), M. Glasser (municipal finance), T. Hastelow (mine closure costs), K. Hunt (mine closure process), and W. McCulloch (housing). D. Craig, T. Hoopengardner and G. Hughes were the peer reviewers. N. Sumardi prepared charts and tables and was responsible for the production of the report. The report was prepared under the guidance of D. Lallement, Division Chief and B. Kavalsky, Director. The Minister and Deputy Ministers of Coal Industry were the main coordinators of the effort on the Ukrainian side. The staff of the Ministry of Coal Industry, Ministry of Economy, Ministry of Finance, Ministry of Power, Ministry of Social Protection, State Committee of Housing and Communal Services, and several coal industry enterprises actively participated in the work of the missions. Data for the report were collected by the Donetsk Coal Mining Research Institute. The first draft of the report was prepared in November 1995. The draft was discussed with representatives of the Government of Ukraine in a meeting organized by the Know How Fund in the United Kingdom in January 1996. The Ukrainian team was led by V. Yevtukhov, Vice-Prime Minister for Fuel and Energy, and the Bank team by D. Lallement, Division Chief, EC41N. Based on comments from the Government, the report was revised and is expected to be presented at a conference in Ukraine in April 1996. The report drew on the document "Program for the Development of the Coal Mining Industry of Ukraine and its Social Sphere up to the Year 2005" approved by the Cabinet of Ministers in 1994. In addition, a number of earlier World Bank reports on Ukraine were also utilized such as the Energy Sector Review, Environment Study, and Country Assistance Strategy. We wish to thank the authors of these reports for allowing us to use some of their findings.  Executive Summary UKRAINE COAL INDUSTRY RESTRUCTURING Executive Summary The Ukrainian coal industry is in a deep crisis. Between 1990 and 1995, coal output (after washing) decreased by about 50 percent to less than 70 mt/year. The productivity of Ukrainian coal miners -- about 600 thousand workers are employed directly in coal extraction -- is low not only by international comparison, but even by historical Ukrainian standards. In the 1980s, domestically produced coal covered about one third of Ukraine's primary energy consumption, and was also one of Ukraine's major export commodities. Coal exports almost totally disappeared in 1995, and imported coal and other fuels captured a large share of the Ukrainian market as a result of artificially maintained high domestic coal prices, untimely delivery and poor coal quality. ii. Despite the high domestic coal prices, the coal industry is unable to cover its production costs due to high material, energy and labor costs. In addition to producing coal, the mining companies also deliver services including pre-school education, health care, housing, recreation, etc. Carrying the cost of these services further reduces the competitiveness of Ukrainian coal mines. Payment arrears accumulated by many of the large coal consumers further contribute to financial difficulties, leading to the inability of many mining enterprises to pay salaries. The capacity and the willingness of the state to subsidize coal production dropped to an all-time low by 1995, due to a general decline of budgetary revenues in a shrinking economy, and the recognition by policy makers that further large-scale production subsidies endangered the macroeconomic stabilization effort. iii. The objective of this report is to propose a strategy that enables the viable core of the industry to survive while keeping the fiscal and social costs of restructuring within acceptable limits. In order to become competitive again, the industry should utilize labor and other resources more effectively so it can produce better quality coal at an average cost that is at least 20 percent lower than the cost of coal produced today. In turn, this requires the implementation of a comprehensive restructuring and reform program with the following main building blocks: * liberalization of coal markets; * establishing new corporatized entities by combining economically viable coal mines, washing plants and marketing organizations; * rapidly closing uneconomic mines; * mitigating the social costs of restructuring by facilitating the transfer of employees to other mines, limiting new recruitment, and funding job creation programs; * transferring the social assets and responsibilities of the coal industry to other organizations; * leaving the financing of investments to the mining companies; and  ii Executive Summary * focussing budgetary support on the cost of mine closures, including social costs, and the divestiture of social assets. iv. Even if the proposed program is adopted, the adjustment will be difficult. It will require the closure of at least one third of the mines and the shedding of up to half of the labor force in the 1996- 2000 period. Furthermore, the probability of a less favorable outcome is quite high, especially if the current crisis is prolonged by halfway measures. The proposed program is described in more detail below. Market Liberalization v. The current system of centrally set wholesale and "accounting" prices creates a number of distortions. The stipulated wholesale prices send the wrong signals to consumers by keeping steam coal prices 20-30 percent above the price of imported coals, and overcharging consumers for washed coal. "Accounting prices" that the mines are paid imply a cross-subsidy from low cost mines to high cost ones, thereby reducing incentives to increase efficiency and denying the opportunity to re-invest profits. In addition, the unpredictability of the administratively established "accounting prices" impedes the ability of the low cost mines to obtain credit from the banking sector. vi. In 1995, most coal was still distributed under a centralized system rather than marketed under contracts which engage suppliers and consumers. While officially only a small portion (less than I percent) of the coal was distributed as "state order" with explicit payments from the state, more than 90 percent of domestic coal production was distributed through Uglesbyt, in a way very similar to the previous central allocation and distribution system and with the same distorting results on the development of a true market. A number of factors reduced the willingness of the mines to pursue direct contracts: (i) high cost mines received the cross-subsidized "accounting" price if they sold through Uglesbyt; (ii) low cost mines had difficulties finding promptly paying customers since they lacked marketing skills; and (iii) there was a perception of state guarantees behind the payments for the fulfillment of "sector orders/plans". vii. The consequences of maintaining this system are negative for the consumers, the coal industry and the state budget. Under cash shortages, Uglesbyt distributes available coal among consumers regardless of the payment capabilities of the clients and with little regard to coal quality. Consumers as well as producers have little influence on the distribution. Large consumers have completely lost confidence in the mining industry's capability to supply cleaner coal, and, each time they get access to cash, they prefer to buy imported coal that is of better quality and is delivered in time. Finally, as the events during the third quarter of 1995 demonstrated, the government still has a moral obligation to ensure that the salaries of coal miners are paid, and can be forced to inject money into the economy earmarked for coal purchases. Uglesbyt acts as the distributor of this money among the mining companies, thereby re-confirming the perception of state guarantees behind "sectoral orders", and promoting further coal sales to insolvent customers. viii. Uglesbyt's monopoly to sell most of the domestically produced coal to domestic customers should be phased out. This implies that the limit on the share of coal that mines can sell directly (either domestically or abroad) at liberalized prices should be increased gradually and reach 100 percent by the time the corporatization process is completed (see below). This would allow the industry to adjust to the  Executive Summnary iii elimination of cross-subsidies between the associations/independent mines that the introduction of direct sales from the mines to customers implies. Corporatization of Economically Viable Mines ix. The Ministry of Coal Industry (MCI), together with the Ministry of Economy and other entities, prepared a Presidential Decree on the restructuring of the coal industry. According to this Decree, MCI will give a separate legal entity to each mine (and other subdivisions) in the coal associations in the first quarter of 1996. Non-core activities (such as construction, transport, engineering, machine building, shops, etc.) and social assets will be separated from coal mines and coal washing plants. The entities that are created will be transformed into joint stock companies (JSCs) by September 1, 1996. It is foreseen that the viable mines and washing plants will be incorporated into about 20 holding companies. The remaining (non-core) enterprises will be privatized. Social assets will be transferred to local governments during 1996 and the first half of 1997 (see below). The holding companies will also include the local marketing branches of Uglesbyt, while Uglesbyt's central planning, coal distribution and revenue transfer functions will disappear. The JSCs will be free to negotiate and determine their own prices (although a temporary declaration requirement will be in effect in 1996 if the contractual price is above the "world market price"). x. The 39 uneconomic mines that have already been identified for closure by MCI (see below) will not be transformed into JSCs. These mines will be administered separately, and closed according to a "state program" to be developed by MCI and submitted to the Cabinet of Ministers in the second quarter of 1996. A single organisation, Ukrainian Coal Company (UCC) that reports to MCI and is funded directly from the budget should manage the closure process. The "charter" of this organisation should specify that it is required to close the mines as quickly and economically as practical, so it does not become a subsidized coal production company, competing with the JSCs. However, the exclusion of 39 uneconomic mines will likely fall short of ensuring the profitability of more than a small minority of the JSCs. Further measures are needed to reduce the costs of the new JSCs. One option is to increase the number of mines that are excluded from the JSCs. Another option is to provide a method for the JSCs to return mines to the state for closure. One way to achieve this would be to include existing "marginal" or "short-life" mines in the JSCs on a lease basis. The JSCs would not own the assets of these mines, and therefore would not carry the burden of the financial liability for closure and environmental restoration. Instead, the JSCs would have a fixed term lease and licence, enabling them to operate the mines. On termination of the lease and licence, renewal would be possible, but neither party would be under an obligation to renew the arrangement. Employees at the mines would have contracts of employment with the JSCs. Closure of Uneconomic Mines xi. A significant part of the coal industry is irreparably uneconomic. The resources required to keep these high cost mines in operation are needed for the full utilization and modernization of the capacity of lower cost mines that have a chance to remain competitive. Without closing uneconomic mines these resources cannot be liberated, increasing the probability that even the lower cost mines will lose their competitiveness in the long run. In the first half of 1995, MCI decided that at least 39 mines with a total coal output of 4.8 mt (1994 figure) should be closed. Out of these, 24 mines are to be closed in the first group starting in 1995.  iv Executive Summary xii. The closing of these 39 mines will reduce the average cost of domestically produced coal only by 4.3 percent. Even assuming that the capacity utilization of the remaining mines will increase to make up for the forgone production of the closed mines (since the lower cost mines will be allowed to reinvest their profits), the average unit cost of domestically produced coal will decrease by less than 8 percent. In order to restore the competitiveness of the Ukrainian coal industry, average unit costs need to be reduced by at least 20 percent. This will require, among other things, the closure of at least 75 high cost mines over a period of 4-5 years (the closure of these mines itself will reduce the average unit cost only by about 9 percent, with possible additional gains coming from the increased capacity utilization of remaining mines). However, if the productivity of workers in the remaining mines does not keep pace with increases in labor costs or the improved capacity utilization of these mines fails to materialize, the number of required mine closures may easily reach 100. xiii. The originally prepared plans estimated the time required for the closure of a mine at 3 years (on average), with a range of up to 13 years. The experience of other countries that closed uneconomic mines has demonstrated that rapid closures with only a minimal recovery of old plant and machinery are the cost effective approach. The preparation of closure plans should be guided by the main objective of cost minimization, and other objectives such as job creation and social services should be addressed separately. Therefore, the original closure plans should be reconsidered in the light of the urgency of the situation, with the objective of finding simpler, cheaper and faster ways to implement the closure program. MCI or its subsidiary (Ukrainian Coal Company) could invite competitive bids from competent organisations, and award a contract to implement the technical tasks related to the closure to the lowest technically satisfactory bidder. Payments under these contracts should be staged according to well-defined milestones, for example (i) the completion of underground works; (ii) the demolition of surface buildings; and (iii) filling or capping the shafts. Following this approach is likely to reduce closure costs significantly. Mitigation of Social Impacts xiv. The closure of uneconomic mines and the need to reduce costs in all mines after the industry starts to operate competitively will significantly reduce the number of jobs in coal extraction. Even under a relatively optimistic scenario, about half of the people directly employed in coal extraction may have to leave over the next five years. Taking into account likely job reductions in other areas (e.g., washing plants, construction, and the social sphere), 300-400 thousand people may need to exit from the coal industry in the medium term. The number of workers that the Ukrainian coal industry needs to shed is one of the highest ever attempted by a single industrial branch in Europe. This task is even more complicated by the high concentration of the mining activities in the Donbas region. Furthermore, the country and the mining industry has to start this process in a period of extreme scarcity of financial resources and the lack of alternative employment due to the depression the economy is currently going through. While indicating the need for specific measures to mitigate the social impacts of restructuring, these considerations also emphasize that the design of these measures should take into account macroeconomic and fiscal realities. xv. In order to minimize disruption and harm to the individuals involved, natural attrition should be the main method of job reduction. Based on employment statistics for 1994 and for the first half of 1995, it appears feasible for many of the employees at the already designated 39 mines to be redeployed at other mines, without a sustained increase in the total number of employees, provided that new recruitment is reduced/eliminated. In most cases, the transfers can be absorbed by natural attrition  Executive Sumnary v in less than one year, and in the worst case in less than two years. In order to compensate for the additional costs of transferring employees from one place of work to another, a payment per transferred employee should be made to the association/JSC that takes the employee over. The eligibility of the association/JSC to receive the transfer payment should depend on the association/lJSC demonstrating that it introduced, at least 3 months before the closure starts, a policy of lirniting the recruitment of new employees to X percent per year of its total labor force, and is committed to maintain this policy in the medium term. xvi. It is unlikely that all employees will wish to be transferred or can be offered comparable jobs. A substantial share of surface workers and older underground workers is likely to become redundant. In addition, surplus labor is likely to be shed by the newly created JSCs in response to competitive pressures to reduce costs. The potential losses of employment in certain regions (particularly in the Donbas) present a genuine concern even if natural attrition is utilized to shed most of the surplus employees. There will be a need for regionally based programs that support that create jobs in order to offset the general decline in the level of the economic activity in the coalfield areas. Among the options to facilitate job creation, re-employment support, retraining of displaced workers and the provision of credit for new business ventures seem to be the least costly and contradictory to market mechanisms. The loan applications should be subject to a careful screening procedure and ex-post evaluation. In addition, the approved applicants could also be given start-up technical assistance in the form of shared office space, communications facilities, training, etc. At a later stage, public employment schemes could be introduced to help the long term unemployed in economically distressed regions. xvii. The most effective measures, however, are likely to be the ones that restore economy- wide growth, such as further reduction of the budget deficit, monetary stability, liberalized trade regime, transparent and predictable legal and regulatory framework, and promotion of the private sector. The ability of the economy to absorb the employees who leave the coal industry will be particularly dependent on the progress of reform in the Donetsk, Lugansk, Volyn, Dnipropetrovsk and Kirovograd oblasts, where the mines are located. Using the number of privatized enterprises as an indicator of economic reform, Donetsk and Dnipropetrovsk oblasts were among the best performers nationally in 1994-95. The picture was less favorable for Lugansk, Kirovograd and Volyn. The pace of privatization was reflected in the amount of foreign direct investment; Donetsk and Dnipropetrovsk oblasts attracted several times more investment than Lugansk, Kirovograd and Volyn. There is ample scope to speed up privatization even in Donetsk, the most advanced oblast (the oblast achieved only 64% of its medium/large scale privatization target in 1995). Furthermore, a policy that actively supports the establishment of new businesses is also needed. Although oblast administration established an office that gives information on procedures and facilitates new ventures, there are still too many bureaucratic requirements. Enterpreneurs also have difficulties finding office space, and gaining access to infrastructure. Ukrainian local and regional authorities may want to study the experience of Central European cities that successfully promoted the growth of the private sector by keeping local taxes low and registration procedures simple, and by establishing "incubator houses" for small ventures and "industrial parks" for larger businesses. Divestiture of Social Assets xviii. The coal industry owns and operates a wide range of social assets (kindergartens, houses, medical facilities, etc.). About 77,000 people (or about 8 percent of all employees) are engaged in the operation and maintenance of these assets. The average cost recovery from the beneficiaries of social  vi Executive Summary after deducting contributions from the beneficiaries, the cost of operating and maintaining these assets is expected to amount to US$ 150 million, representing about 7 percent of total coal production costs. The continued provision of these services by the mines would (i) continue to divert the attention of management from the key task of coal production; (ii) increase the cost of coal thereby reducing the competitiveness of domestic coal mining industry; and (iii) maintain the existing inefficiencies in service provision. xix. According to the Presidential Decree on restructuring (see above), the basic method to be applied in the divestiture of social assets is the transfer of the assets to local governments. Following the transfer, opportunities for the improved utilization of these assets and their privatization should be explored. Specifically, city-wide programs should be adopted to rationalize the utilization of kindergartens. Summer camps, resthouses, vacation facilities, and the majority of housing stock should be privatized. Profilactoria and sanatoria should be placed under existing medical facilities operated by local governments and their utilization rationalized. Together with the housing stock, the assets and staff of the maintenance organizations and utilities should also be transferred. xx. Because cost recovery ratios can be increased only gradually, local governments will need to be provided with substantial financial support for the operation and maintenance these assets. In addition, local governments should also receive technical assistance in the management of operation and maintenance activities and the development of social service rationalization and rehabilitation programs. Financial assistance should be subject to a sliding scale, e.g., covering 60 percent of total costs (including rehabilitation that cannot be postponed) in the first year, 40 percent in the second year, 20 percent in the third year, and no assistance afterwards. Investments xxi. The future of the coal industry in Ukraine depends, to a large extent, on the evolution of domestic coal demand. Based on a forecast presented in this report, coal consumption is expected to be in the range of 75-95 million tons in 2000, and 85-105 million tons in 2005, probably closer to the lower bound. However, the "Program 2005" adopted by the government in March 1994 has foreseen a demand of 150 mt/year in the 2000-2005 period, and proposed large investments to increase production capacity. These as well as previous state-supported mine development investments should be stopped. The highest priority investments, in parallel with managerial/organizational changes, should be aimed at utilizing the full production capacity of existing lower cost mines that have good geological potential. xxii. The focus should be on increasing the running time of the coal cutting machines at the longwall faces and de-bottlenecking the roadways to and from the faces. Face equipment could be partly upgraded and conveyor belts could be renewed. Modem roof control techniques could be introduced. Poor sections of piping for secondary ventilation, compressed air supply and gas and water extraction could be renewed. Obsolete or worn pumps, fans, electric cables and switchgear could be replaced. Investments specifically designed to support organizational/managerial changes for improved mine safety and health could include the purchase of equipment to extract gas, suppress dust, improve ventilation, control air quality and provide personal protection. Although there is an overcapacity in existing coal washing plants, there may be some potential to increase efficiency of selected plants in a low-cost manner. In order to reduce coal transport costs, smaller, semi-mobile modern plants could be considered for some mines.  Executive Summary vii xxiii. Recently, two mechanisms have been introduced to address the problem of funding investments in coal exploration and mining. The first one is the system of "differentiated rents" deducted from the wholesale price. The collected rental payments will be available to finance investments primarily in coal exploration and to cover the cost of restructuring. In order to reduce uncertainty and avoid perverse incentives, the rents should be set in a transparent manner based on geological factors (independent of actual performance) and left unchanged (in real terms) for an extended period. An additional consideration is the ability of the mines to carry the extra burden that this rental payment system creates. Therefore, the size of the rent should be limited to a few percent of the sale price. xxiv. The second mechanism is the Energy Development Fund that utilizes revenues from import taxes on coal (ECU 1-2/t) and light oil products (15 percent or at least ECU 15/t). Total revenues of the fund are estimated at US$ 120-150 millionlyear. The main problem with this fund is that it might maintain a system of centrally determined and funded investments despite the proven inefficiency of such a system in the coal mining industry in the past. The solution is to liberalize prices and allow financially independent companies to decide about investments and compete for credit from the banking sector. In view of the low efficiency of centrally planned and funded investments, a policy of self-financing (from accumulated funds or credit) of mine development and equipment replacement investments should be followed. The resources that accrue to the fund should be applied to finance the technical and social cost of mine closures and other expenses associated with the restructuring process. Budgetary Support xxv. In view of the critical situation of the Ukrainian coal industry, most of the cost of restructuring has to be borne by the budget. However, it is important to channel budgetary support in a way that minimizes the risk of distorting decisions about future production activities and investments. In other words, the market rather than the government should decide about the allocation of resources for coal production. This can be achieved if budgetary support is primarily aimed at relieving the industry of unproductive expenditures such as the cost of social protection and mine closures while phasing out the utilization of public funds for investments. xxvi. Budgetary resources that support the operation and maintenance of social assets should initially be provided to the mining companies. Over time, as the assets are divested, more and more support should be channelled to local governments. Assuming that (i) support from the central government budget is gradually reduced over time; and (ii) cost savings from rationalization and privatization proceeds are fully utilized to finance the rehabilitation of remaining assets, about US$ 130 million support from the central government needs to be budgeted for 1996, US$ 90 million for 1997, and US$ 45 million for 1998. Additional resources need to be provided to regions/cities where major job losses occur for the retraining of workers and the establishment of funds that facilitate job creation (credit lines and public employment programs). The necessary budgetary outlay for this purpose is estimated at US$ 20 million per year. xxvii. All other budgetary support for restructuring should be channeled through Ukrainian Coal Company, the organization entrusted with the implementation of mine closures. Assuming that, on average, about 20 mines will be closed annually in the 1996-2000 period, the budget of Ukrainian Coal Company should be about US$ 130 million per year, consisting of US$ 50 million per year to cover technical closure costs, US$ 15 million per year to cover environmental protection costs, US$ 15 million per year for payments to cover the cost of transferring employees from the closing mines to other mines,  viii Executive Sumunary US$ 25 million per year for severance pay and re-employment support to workers who do not wish to (or cannot) be transferred; and US$ 25 million per year for disability payments and the provision of coal to pensioners. l xxviii. It will cost substantially less for the budget to pay for the closure of uneconomic mines than to cover their losses indefinitely. This can be seen if, after excluding payments associated with the transfer of social assets, disability, and the coal to pensioners, the remaining US$ 125 million per year budgetary outlay is compared to the cost savings due to the closure of uneconomic mines. The closure of 80-100 mines, even without taking into account possible gains from the improved capacity utilization of the remaining mines, is expected to reduce the average unit cost of domestically produced coal by 9-12 percent and save US$ 200-250 million per year if the production of these mines is replaced with imported coal. Savings will be substantially higher if the remaining mines, after reinvesting profits that they are allowed to keep under this scenario, are able to improve the utilization of their capacity, thereby making additional imports unnecessary.  I. Introduction and Background 1 1. INTRODUCTION AND BACKGROUND A. Introduction 1. In 1994, Ukraine's coal industry employed 998 thousand people, or 4.3 percent of the labor force of the country'. The coal industry supplied 76 mt of coal, with a market value of about US$ 2,300 million, meeting 24 percent of total primary energy demand in Ukraine. Coal miners received one of the highest salaries among industrial employees, were the best organized, and wielded considerable political influence. The presidential and parliamentary elections of 1994, for example, were scheduled one year ahead of time in response to demands made by striking coal miners. 2. The Ukrainian coal industry is in a deep crisis. Between 1990 and 1995, production decreased by 50 percent. Coal used to be one of the major Ukrainian export commodities (20 mt of coal was exported in 1990), however, coal exports almost totally disappeared in 1995, while imported coal captured 20 percent of the Ukrainian market as a result of high domestic coal prices, problems with timely delivery and coal quality, and the agressive marketing of Russian and Polish coals. The productivity of Ukrainian coal miners is extremely low by international comparison, and now it is low even by historical Ukrainian standards: employees engaged in the core production activities produced on average only 105 t of saleable coal per capita in 1995, a drop of 34 percent since 19902. Despite high domestic coal prices, the coal industry was unable to cover its costs. Payment arrears accumulated by many of its traditional customers further contributed to the financial crisis, leading to the inability of many mining enterprises to pay salaries. The ability and the willingness of the state to subsidize coal production dropped to an all-time low by 1995, due to a general decline of budgetary revenues in the shrinking economy, and the recognition by policy makers that further large-scale production subsidies endangered the macroeconomic stabilization effort. 3. In Ukraine as elsewhere in the former Soviet Union, mining companies not only produced coal, but also delivered services including pre-school education, health care, housing, recreation, etc. The services were provided to employees, their families, and in some cases to the population at large. In an open economy, carrying the cost of these services further reduces the competitiveness of coal mines. While some scope for rationalization certainly exists, the complete elimination of these services would be untenable from a socio-political point of view, further complicating the restructuring of the coal mining industry. 4. The purpose of this report, prepared in response to a request by the Ministry of Coal Industry, is to outline a comprehensive reform program for the Ukrainian coal sector. In order to survive the current crisis, the coal industry should reduce its production costs and improve the quality of saleable coal. While striving to achieve these goals, the industry has to operate within strict financial and social constraints. The budgetary burden and the social costs of the adjustment -- subsidies to the mining industry as a percentage of budget expenditures and the unemployment ratio in the most affected regions - - should remain tolerable. 1/ For the purpose of this report, the coal industry/coal sector is defined as all the enterprises that report to the Ministry of Coal Industry as of 1995. 2/ For comparison, hard coal mines produce about 200 t of coal per employee per year in Russia, 400 t in Poland, 2,000 t in the United Kingdom, and 4,000 t in North America.  2 I. Introduction and Background 5. The first chapter of the report provides an overview of past development policies in the coal sector, and briefly describes the environmental performance of the coal industry. The second chapter analyzes domestic demand and the export outlook for the coal industry. The third chapter describes the production and import of coal, including an analysis of production costs and the use of labor. The fourth chapter describes institutional and pricing arrangements, and outlines options for restructuring. The fifth chapter discusses the issues that will emerge during the restructuring process. Finally, the appendix contains an Action Plan that summarizes the most important recommendations. B. Past Development Policies 6. Large-scale coal production in Ukraine began in the Donets Basin (Donbas) in 1870, at the outset of the railroad era in the Russian Empire. By 1913, annual production reached 25 million tons, 87 percent of the total produced within the Empire. Extensive development of the Donbas was spurred by the nearby availability of primary resources for iron and steel production: iron ore is brought in from nearby Krivyi Rih and ferro-alloy manganese from Nykopil. Coal output reached its peak in 1976 with 191 million tons (run-of-mine, before washing), including more than half of the total metallurgical coal production of the Soviet Union. In addition to metallurgical coal, anthracite and other high grade thermal coals are also abundant in the Donbas, as well as coalbed gas. There are significant shallow and surface minable lignite deposits in the northern part of the Donbas and west of the Dnieper River. Bituminous coking coal deposits can be found in the Lviv-Volyn Basin near the Polish border. 7. Ukraine's total coal reserves amount to 52 billion tons of which 23 billion tons are proven and probable (excluding possible) reserves. Cumulative coal production has been more than five billion tons. Ukraine has practically unlimited supply of coal. However, a large portion of the reserves appear to be uneconomic. The geological reasons for the high costs and the low productivity are great depth, high temperature, frequent gas outbursts and thin coal seams. These factors are still worsening: average depth, temperature and rock pressure increase as mining proceeds from top to bottom; and the average seamn thickness decreases as miners exploit the easier, thicker seams first before proceeding to more difficult, thinner seams. As mining progresses towards greater depth and away from the shaft, transport of men, materials and coal become longer and more difficult. Air passage ways increase and air temperature is rising consequently. Sinking of wider and deeper shafts, to get easy access to the coal, cannot be economically justified for deep and thin coal seams. Therefore, engineers and planners of the former Soviet Union decided to invest in Siberia and Kazakhstan where coal occurs in thick seams near the surface and a higher return on the investment can be expected. More generally, mining shifted from underground to surface operations everywhere in the world. This trend was reinforced by the rapidly increasing availability of oil and gas after World War II. Deep coal mining in Western Europe reacted since the late 1950s by closing uneconomic, non-competitive mines, and increasingly concentrating the declining production on the best mines only. 8. Following independence, the Ukrainian coal industry hoped that the declining trend of coal production would be reversed with generous support from the state. In 1992-94, long term planning focussed on finding ways to increase coal output in order to reduce Ukraine's dependence on imported fuels. The reduction of production costs did not receive a high priority, and no decision to concentrate coal production on the best mines was made. Instead, funds were systematically channeled from the better mines to the worse mines to sustain the operation of the latter. As a result, improvisations were made in the poorer mines and sacrifices in the better-ones, dragging down the industry as a whole. The poorer mines possess now a complicated network of cross-cuts and inclines which was continuously extended with relatively low investments, causing rapidly increasing operating costs due to restrictions  I. Introduction and Background 3 in the transport of men, materials and coal. The better mines could not make full use of their potential, due to a lack of funds for rationalization and modernization investments. 9. In early 1994, the Cabinet of Ministers approved a "Program for the Development of the Coal Mining Industry of Ukraine and its Social Sphere up to the Year 2005". The "Program" was based on the expectation that coal demand would stabilize in 1994 and then rapidly increase. Accordingly, the "Program" included the construction of 21 new mines, capacity increases in 14 existing mines, and reconstruction of 46 mines, to be funded by the state. In addition, the "Program" included the construction of housing of 18.8 million rn2, hospitals with 9,612 beds, ambulatories with a capacity of 20,780 patients per day, cultural facilities with a capacity of 7,458 people, schools for 87,132 students, and kindergartens for 34,975 children. The closure of 48 mines in the 1995-2005 period was also planned, mostly in response to the expected exhaustion of their mineable coal reserves. The closure of ten washing plants was also proposed. While the "Program" included the corporatization of enterprises and the replacement of centrally controlled wholesale prices with contractual prices agreed between buyers and sellers, the target date for the implementation of these actions was left unspecified. 10. In 1995, the new government recognized that the devastating state of the industry calls for speeding up the corporatization and price liberalization process, and the rapid closing of the most uneconomic mines. Thirty nine mines were selected for closure, including 24 mines that were to be closed in the first group in 1995-1998. The government promised to help to alleviate the social problems connected with the closing of mines, and urged the coal industry to focus on the rationalization of the better mines through organizational/managerial changes and targeted investments. In addition, preparatory work was started so that the corporatization and restructuring of the coal industry can be completed in 1996. It became clear that without a fundamental change of established attitudes and practices, further deepening of the current crisis of the coal industry is unavoidable. C. Environmental Performance i1. Mining and washing of coal. Environmental problems generally associated with coal mining include: (i) the discharge of saline mine drainage to surface waters; (ii) surface disposal of waste rock and tailings in large, poorly controlled and managed disposal dumps; (iii) coalbed methane disposal; (iv) disposal of coal washery waste, particularly waste containing a high percentage of combustibles; (v) temporary storage of coal; and (vi) land subsidence. Most of these problems can be observed in Ukraine. In addition, Ukrainian mines have a poor safety and health record. 12. Ukrainian coal mines extract an average of 3 m3 of waste water (which must be removed from mine shafts) for every ton of coal produced.3 Some of this waste water is used in mine operations or in coal washing plants that are in close proximity to mines. However, the volume of water reused by coal mines and washeries is small, and 80-95 percent of the water removed from the mines is eventually discharged to the surface environment. Salinity concentration of these waters range from an innocuous 30 mg/I to an environmentally hazardous 4,000 mg/l. Saline water discharged from mines in the Donbas significantly degrades the quality, and therefore use, of surface waters originating or passing through this region. The dry climate of the east and southeast parts of Ukraine cause chronic water deficiency problems. This situation aggravates pollution levels in the North-Donets River, the largest river draining these areas. Salinization of agricultural soils is a growing problem in irrigated fields that use water from 3/ For example, the mine3 in the Donetskugol Association produce about 66 million m3 of waste water per year, in the Stakhanovugol Association about 126 million m3 per year, and in the Thorezantratsit Association 63 million m3 of waste water per year  4 1. Introduction and Background the North-Donets river, and there are no alternative sources of irrigation water that can easily be developed (ground water tends to be naturally saline or too limited and difficult to extract, and interbasin transfer of water from the Dnieper River is of inadequate volume). Therefore, the surface discharge of saline water from mine dewatering should be reduced. In addition, concentrating the mining activities in the better mines would also reduce waste water discharges. 13. Mine waste rock and coal washery tailings have been accumulating on the surface for many years. These dumps tend to undergo internal spontaneous combustion, and are rarely effectively rehabilitated. It appears common practice to mix large particle coal washery wastes and material removed from coal washery tailings dams during dam rehabilitation with waste rock in dumps operated by coal mining associations. Without careful placement of this material in dumps, the chance of spontaneous combustion within the dumps is high.4 Washery waste storage ponds cover large areas, and the material discharged to the ponds has 30-50% percent combustible content.5 When these storage ponds are rehabilitated (settled small particle material removed), the waste is either sent to thermal power stations for use as a fuel or placed in mine waste rock storage dumps. Many of the dumps are located in residential areas or in prime development sites in the regional administrative centers (including Donetsk). 14. The main environmental problems caused by the waste dumps and ponds are (i) health problems associated with elevated airborne dust concentrations; (ii) shallow groundwater contamination by saline water leachate; and (iii) public health, safety and nuisance problems indirectly caused by high temperatures generated within the dumps when they catch fire. The disposal and rehabilitation of waste rock dumps has become a particularly difficult problem because of encroachment of urban development up to the boundaries of the mines. In addition, the method of waste placement in the dumps is generally unacceptable. Slopes of the dumps are far too steep, the height of dumps tend to be too great, little attention has been given to disposal methods that prevent oxygen and water from entering the dump, and even temporary stabilization of small particle material to prevent its mobilization into the atmosphere is generally absent. Recent attempts to reform the dumps by removing part of the "cone" have been prompted by a desire to contain and extinguish fires. The injection of incombustible materials and/or the sealing of the sides of the dumps might prove to be more effective methods. However, experience suggests that once a fire starts in a dump, it is very difficult to extinguish. The emphasis should therefore be on prevention. The rehabilitation/reshaping of waste rock dumps for beneficial land use, including office/residential development, urban amenities, or agriculture could be considered. If economic, the commercial reclamation of coal from waste rock dumps can be part of dump rehabilitation (the mining companies estimate that 5-15 percent of waste rock dumps is coal, but the true amount could be higher as suggested by the high number of waste dumps on fire). It is more likely that the washery tailings piles can be economically reprocessed since these contain a much higher percentage of coal. However, the material is extremely fine and will require small semi-mobile processing plants specially designed to separate this very fine material. 15. Reduction of methane concentration in mine ventilation air is a prime concern in the gassy coal mines of the Donbas (in some locations, gas content is as high as 40 m3 per ton of coal). To reduce 4/ For example, the Donetskugol Association, one of the two associations with operations within the boundaries of Donetsk city, operates 107 waste rock dumps, of which 37 are currently on fire. Approximately 220 million ml of waste rock is stored in these dumps, with more material added daily. Thorezantratsit operates 96 waste rock dumps, with a total volume of about 131 million m3, with 26 dumps being currently on fire. 5/ Waste rock dumps that belong to the 22 washing plants of the Donetsk Coal Cleaning Association cover an area of 540 ha, while liquid washing waste disposal ponds cover 813 ha.  1. Introduction and Background 5 the risk of gas eruptions and explosions, methane gas is extracted from gas rich coal seams, in particular coking coal seams, ahead of mining.6 Boreholes serve as the most commnonly applied technique. It was estimated that coal mining activities liberated 3.4 billion m3 of methane in 1990, the bulk of which was vented into the atmosphere. Much of the coalbed methane gas recovered annually by mine methane drainage systems are not considered of pipeline quality, and less than 20 percent of the drained methane is utilized (mostly in boilers). As an interesting example, Donetskugol has constructed a storage and filling station that supplies fuel for up to 200 trucks and buses operated by the association. In order to reduce the greenhouse effect (and possibly also mining costs), options for the improved extraction and utilization of the gas should be explored.' 16. Ukrainian mines have serious safety and health problems. Many of the coal seams extracted are gassy, and gas bursts from active coal faces have been frequent. The risks of gas bursts are particularly high in several coking coal mines with difficult geological conditions despite restrictions imposed on coal extraction under these circumstances. The degasification of coal seams and surrounding rock strata prior and during mining have also not been able to eliminate gas explosions. The number of lethal accidents is very high (259 miners were killed in 1994, and 263 in the first nine months of 1995), particularly when compared to coal output. Coal dust, in addition to being an explosion and fire hazard, negatively effects the health of underground workers. Lung disease is widely spread among Ukrainian coal miners. Health hazards are exacerbated by the lack of fresh air and high temperatures underground. Poor ventilation is the result of narrow cross sections of shafts and roadways, great depths and long distances underground, including a complicated network of roadways which support coal production from several production units dispersed throughout the mines. Since the main causes of safety and health hazards are geological in nature, more selectivity of mining is essential to increase the safety of workers. However, some of the accidents are caused by the low morale of workers, lack of motivation and authority of supervisors, inadequate safety training and instructions, and poor institutional arrangements for the enforcement of regulations and follow-through on analysing the causes of accidents. 17. Use of coal as a fuel. The use of coal as a fuel can result in significant environmental degradation, impacts on human health, and soil chemistry changes leading to loss of agricultural production. This phenomena is well recognized, can be felt at the local, regional and global level, and is more pronounced if pollution control over emissions are inadequate and the coal quality is poor. While engineering solutions exist to control harmful emissions from use of coal as a source of energy, pollution control is expensive, and that expense can rise significantly as the concentration of pollutants produced by coal combustion increases. The quality of the coal being used (sulfur, nitrogen, and ash content, and thermal capacity) is the main factor determining the volume of uncontrolled emissions from any facility using it as a source of fuel. Locally produced coal in Ukraine tends to have moderate to high ash and sulfur content (25-50 percent ash and 2.5 percent average sulfur content). Less than 5 percent of mines produce coal with less than 1 percent sulfur, and the output of these mines represents only 6 percent of the coal produced in Ukraine. Anthracite or semi-anthracite represents 60 percent of non-coking coal production, making some common methods of NOx control in thermal power stations difficult or impossible to use (e.g., application of low NOx burners). 6/ Before steeply inclined thicker seams can be mined, the mining of neighboring thin seams is required for decompression and gas release. In order to reduce costs, it would be worthwhile to investigate whether the requirement could be dropped by applying improved gas extraction technology. 7/ A number of low-cost gas enrichment processes are available, such as Pressure Swing Absorption and Membrane Gas Separation. Following enrichment, existing natural gas pipeline systems could be used to transport gas away from the producing sites. Coalbed methane can also be used to power small to medium-sized internal combustion engines for electricity generation, and electricity can be used to refrigerate the air for ventilation in deep mines.  6 I. Introduction and Background 18. The Air Quality Act of 1993 sets charges for disposal of pollutants to the atmosphere. These are essentially user fees and are levied against all emissions, not just those over the "permissible" amount (for which the fee is increased 5 times). The base emission charge applied in Ukraine for both SOx and NOx was set at Krb 105,064/t in 1993, and it has not been changed yet. While this charge was equivalent to US$ 30/ton at that time, inflation reduced its value to less than US$ 1/t by mid-1995. A more realistic cost of discharging these pollutants to the environment (within internationally accepted ambient air quality standards) would be between US$ 120-250/t. Therefore, the emission charges specified in the Air Quality Act of 1993 should be increased immediately to compensate for the inflation since 1993, and gradually increased after that by 4-10 times. In addition, the installation of permanent emission monitoring equipment should be required for all boilers with gross rated power output of more than 200 MW. These measures would favor the production and use of less polluting coals, minimizing pollution control costs and damage to the environment and human health. 19. Permanent disposal of coal fly ash alters land use of the disposal site permanently. Since the resulting land use is rarely as beneficial as that of the land in its original state, significant economic losses occur. Land markets, however, do not function in Ukraine, and their development will take considerable time. There is a disposal charge currently levied against enterprises by local environmental inspectorate offices for the disposal of coal fly ash, however, it is set at an unrealistically low level (Krb 46/t or UScent 0.03/t equivalent). Improvement in coal quality can be achieved through washing, and the percent ash reduction in the coal is usually reflected as an approximately equal reduction in the amount of ash that must be placed to permanent disposal after burning the coal. Although coal washing would significantly lower the ash content and also slightly lower the sulfur content of most Ukrainian coal, the Government places strong economic disincentives on the use of washed coal by setting the price of washed coal at artificially high levels (see Section B of Chapter IV), and setting ash disposal charges too low. Given proper coal prices and ash disposal charges, the purchase of washed coal should be more economic for the consumers than unwashed coal. Therefore, ash disposal charges should be increased several times, and the artifically high prices for washed coal first reduced, and later liberalized.  II. Domestic Coal Demand and Export 7 Il. DOMESTIC COAL DEMAND AND EXPORT 20. Although coal is a tradeable commodity, the cost of transporting coal over large distances is quite substantial. Therefore, from the point of view of meeting domestic demand, Ukrainian coal mines have a natural advantage over imported coals. In other words, the future of the coal industry in Ukraine depends, to a large extent, on the evolution of domestic coal demand. 21. In the 1990-1995 period, domestic consumption of coal decreased by 40 percent from 132 mt to 79 mt (see Table 2.1). Although most of the decrease was due to the general decline of economic activity, the share of coal in total primary energy consumption also declined from 27.6 percent to 25.2 percent, indicating that part of the coal market was taken over by other fuels (particularly natural gas and nuclear energy). TABLE 2.1 PRIMARY ENERGY SUPPLY AND CONSUMPTION Year 1990 1991 1992 1993 1994 1995 PRODUCTION washed coal (mt) 130.7 108.7 105.4 91.0 75.9 65.6 crude oil & condensate (mt 5.3 4.9 4.5 4.2 4.2 4.0 natural gas (born) 27.8 24.0 22.0 19.2 18.3 18.1 peat & wood (rnt) 4.3 4.0 3.7 4.1 4.0 3.9 nuelear (TWh) 76.2 75.1 73.7 75.2 68.9 70.5 hydro lTWh) 10.3 11.5 7.8 11.2 12.3 10.1 Total Production (mto.) 116.77 102.10 97.02 88.44 78.81 73.1 IMPORT coal (mt) 21.1 12.7 11.7 8.7 7.5 16.0 crude oil (mt) 54.3 49.6 35.3 19.7 15.8 13.3 natural gas, net (bun) 87.3 89.5 89.1 79.8 69.1 64.4 petroleum products (mr) 11.5 13.1 5.0 6.2 5.2 11.1 Total Import (mtoe) 150.56 145.13 121.88 98.06 83.49 87.1 EXPORT coal (mt) 20.0 13.7 7.8 3.5 4.6 2.4 petroleum products (mnt) 11.3 8.4 6.4 1.1 1.7 1.4 ectricty, net (Tlwh) 28.0 14.3 4.6 1.2 1.1 4.1 Totat Export (mto.) 28.30 18.83 11.45 3.16 4.28 3.6 Primary Energy Consumption(mto.) 239.02 228.40 207.45 183.38 188.02 156.6 Annual Percentage Change -4.4% -9.2% -11.6% -13.8% -1.7% Notes: A ton of oil equivalent is defined as 10 million kcal. The applied conversion factors are: coal - 0.3, crude oil - 1.0, peat & wood - 0.2, hydro & electricity - 0.25, natural gas - 0.85, petroleum products - I.0.  8 II. Domestic Coal Demand and Export 22. A forecast for the domestic demand for saleable coal up to the year 2005 is presented below. Over this period, coal consumption will be driven mainly by the evolution of coal demand in the two largest coal consuming sectors of the economy -- power plants and the steel industry -- which make up nearly three-fourth of the overall demand for coal. The uncertainty over the future course of the development of the electricity and steel sectors is accommodated by a high and a low demand scenario: (i) Steam coal. Under the Low Case, projected demand for steam coal is derived primarily from the World Bank's medium scenario for gross electricity consumption.8 After bottoming out in 1997, electricity use is expected to recover at a moderate pace in the subsequent period. The share of coal in power plant fossil fuel consumption is not expected to differ significantly from the recently observed 45-47 percent. Under the High Case, steam coal demand is on a higher path due to the greater demand for electricity (as implied by the World Bank's high demand scenario) and the assumed increased share of coal -- up to 55 percent by 2000 -- in electricity generation.9 In the general heat market, coal use is expected to trend downward until 1996-97 and hold steady later under both cases (see Table 2.2). The Low Case projects that consumption bottoms out in 1997-98, followed by a weak recovery. Even in 2005, steam coal demand would be only three-fourth of the pre-crisis level (1990). Under the High Case, the demand recovery is more buoyant, and in 2005 the projected consumption approaches the 1994 level; but under the Low Case, it stays about 20 percent lower (see Figure 2.1). Figure 2.1 Ukraine Steam Coal Consumption (1990-2005) V ~~70 HIGH CASE 1 50 t LOW CASE _ _ _ N % g o a 8 Year5 8/ A detailed presentation of the Bank's electricity demand projection can be found in Annex I of the Staff Appraisal Report for the Ukraine Hydropower Rehabilitation and System Control Project, March 20, 1995 (Report No. 13663-UA). 9/ The higher share of coal in electricity generation under this scenario is based on the program to rehabilitate coal- fired thermal power plants in order to, among other things, reduce the co-firing of imported fuels (oil and gas). It is worth noting that co-firing is also dependent on coal quality, therefore the coal industry itself can increase demand for coal by providing coal to the power plants that meets boiler design specifications.  11. Domestic Coal Demand and Export 9 TABLE 2.2 FORECAST OF COAL CONSUMPTION (MILLION TONS, 1990-2005) Low Forecast 1990 1995 2000 2005 Steam Coal Power Plants 31.8 36.0 36.2 42.6 General Heat Market 44.5 17.3 16.9 16.9 Households 16.2 6.3 6.0 6.0 Communal 3.6 2.5 2.4 2.4 Other 24.7 8.5 8.5 8.5 Total Steam Coal 76.3 53.3 53.1 59.5 Coking Coal 55.6 22.2 24.0 26.2 TOTAL 131.9 75.5 77.1 85.8 :High Forecast 1990 1995 2000 2005 Steam Coal Power Plants 31.8 40.1 48.0 58.6 General Heat Market 44.5 17.3 16.9 16.9 Households 16.2 6.3 6.0 6.0 Communal 3.6 2.5 2.4 2.4 Other 24.7 8.5 8.5 8.5 Total Steam Coal 76.3 57.4 64.9 75.5 Coking Coal 55.6 22.2 27.1 32.5 TOTAL 131.9 79.6 92.1 108.0 (ii) Coking coal. The demand for coking coal will be driven by the future course of the development of the steel sector. The severe decline experienced by the steel industry since 1990 appears to have slowed down to about 5 percent in 1995, and a mild recovery may begin in 1996-97. The Ministry of Economy predicts that steel production in 2000 could be 20 to 60 percent above the depressed level of 1994. Significant improvements are expected in the efficiency of coal utilization due to the wider adoption of continuous steel casting. Based on these assumptions, the Low Case projects that demand in 2005 will be close to the level registered in 1994. Under the High Case, the assumed larger steel output induces a moderate coal demand recovery, but even in 2005 coking coal use would less than 60 percent of the 1990 level (see Figure 2.2 ). (iii) Total coal demand. While under the Low Case the overall demand for coal is seen to bottom out in 1996-97, followed by a mild recovery, under the High Case demand stabilizes in 1995-96, followed by a faster recovery until 2005. In the year 2000, aggregate coal consumption is  10 II. Domestic Coal Demand and Export expected to be in the range of 75-95 million tons; and in the year 2005, 85-105 million tons, probably closer to the lower bound (see Figure 2.3). Figure 2.2 Ukrine Coking Coal Consumption (1990-2005) 56 | i g | i | |i ii {fi 46 Figure 2.3 Ukraine Saleable Coal Consumption (1990-2005) 1 140 30 ~~~HIGH CASE 20 LOW CASE 23. Although it is not quantified in the forecast, coal demand is expected to level off in the 2005-2010 period. A least cost power investrnent analysis carried out by Bank staff indicates that no new coal-fired power plant will be built in Ukraine.'