Event: Six private coal companies won the tender to supply Donbasenergo with coal in 2H2010. The total cost of the 120 kt will be UAH 78.8 mln ($10 mln), including 20% VAT.

Impact: The news is marginally positive for DOEN, and positive for coal sector.

Rationale: The price for thermal coal obtained within this tender is advantageous for Donbasenergo. While ZAEN signed an agreement for 2H2010 with DTEK for coal procurements at UAH 621 per tonne, DOEN will pay 12% less (UAH 547/t). This is also less than the price from state mines, which follow the base level of UAH 580/t. The discount will lead to an increase in DOEN’s bottom line. However, 120 kt is insignificant for the company as DOEN will consume about 2.1 MT of coal in 2H2010.

This news is also positive for the coal sector as it confirms the liberalization of the coal market, which was announced in the end of spring. As a result, we expect an increase in supply from cost-efficient private mines, which may lead to lower thermal coal prices on the domestic market. In 2009 and in the beginning of 2010, state-owned electricity generating companies (GenCos) were obliged to purchase coal only from state mines despite lucrative offers from private companies, thus deadlocking GenCos.

Tags: Coal, Metals and Mining, Donbasenergo