BMI View: Russia's g old and coal production growth will outperform P GM's and iron ore output growth. However, global metal price weakness, the country's inadequate infrastructure and Western sanctions will curb the sector's overall growth.
Although Russia's mining sector holds significant production growth potential, due to its rich mineral deposits, including coal, iron ore, gold and platinum, the country's bureaucratic hurdles, Western sanctions and weak mineral prices will limit new projects from coming online and weaken mining output growth over the coming quarters.
|Coal And Gold To Outperform|
|Russia - Select Mining Production (% chg y-o-y)|
|f = BMI forecast. Source: National Sources, BMI|
Coal To Fuel Growth
The Russian government's plan to spend an estimated USD123bn developing the country's coal reserves over 2012-2030, alongside major investment into logistics and engineering capacities will support the country's coal production growth over the coming years. We expect a gradual re-orientation of Russia's coal exports from Europe to Asia will be driven by growing demand for both thermal and coking coal in the region. Russian coal miners will benefit from rising coal demand from Asia and several major infrastructure projects are underway to facilitate greater coal trade flows.
Regulatory Environment To Limit Growth
The Russian government will maintain strong influence on the country's mining industry. For instance, the government holds significant stockpiles of palladium and restricts the amount of palladium that can be exported each year. This way, the Russian government can exert significant influence over the global palladium price through sales of its stockpiles.
Foreign firms are also restricted from investing the country's industry. For instance, companies seeking to develop a 'strategic resource', defined as a region with more than 1.6million ounces (moz) of gold and 500kt of copper, must seek permission from a government commission. Diamonds, uranium, cobalt, nickel, lithium, the platinum group metals, tantalum and niobium cannot be mined by foreign firms. In practice, legal obstacles to foreign investment have prevented large overseas firms from developing exploration projects, and smaller reserves are relatively unattractive given the bureaucratic problems. We expect the regulatory structure to remain favourable to domestic investment with obstacles to foreign investment remaining.
Western Sanctions To Impair Infrastructure Growth
We expect Western-sanctions will limit the Russian government's capacity to fund infrastructure projects, which will adversely affect the country's mining industry growth over the coming quarters. The sanctions prohibit the European Bank for Reconstruction and Development (EBRD) to lend money to Russia, thereby hindering Russia's capability to finance infrastructure projects. Russia's natural resource-heavy economy is heavily reliant on infrastructure for the transport of goods, both for domestic consumption and export. In response, we expect financial lending to increase from both China and the Middle East, which will limit the sanctions influence over the coming quarters.