Steel Mont Trading Ltd intends to reduce the supply of South African coal to Ukraine from the planned 1 million tons to 0.5 million tons to avoid reputational risks. The state-owned Ukrinterenergo power company’s Director Volodymyr Zinevych announced this at a press conference in Kiev on Tuesday, the Interfax Ukraine news agency reports.

According to him, the reason for this is an investigation launched the in Ukraine by the Prosecutor-General’s Office.

"We have a signed specification for 500,000 tons, and the trader does not want to deal with us anymore. It is currently having to resolve very complex reputational issues with its bank, with its other partners... Therefore, I currently do not see more than 500,000 tons," he said.

"We have a separate specification signed for every 250,000 tons. It could be stopped at any moment, depending on the situation on the market and the supply of coal," he said.

Zinevych added that Ukrinterenergo was continuing talks with various companies. In particular, according to him, a meeting with representatives of RWE and E-On is scheduled for Wednesday. "Talks are constantly being held, but honestly speaking, there is no progress yet," he said.

As reported, Ukrinterenergo signed an agreement with Steel Mont Trading Ltd for supply of 1 million tons of anthracite coal to Ukraine on August 19. Ukraine was supposed to receive about 250,000 tons of coal per month under this agreement. Two out of every three freighters carrying steam coal from South Africa will be processed at the Ilyichevsk port and the others at the Yuzhny port.

According to the head of Ukrinterenergo, the issue of diversification of energy supplies should be decided at the political level after formation of a ruling coalition and a new government. "Let us wait for formation of a coalition, formation of a new government, and formulation of a new energy strategy in order to understand whether there will be a course toward diversification or not. Can Russia provide the necessary quantity of coal to us? Yes, it can. We can buy everything from Russia. Whether we need to diversify sources of supply is a political issue," he said.

Zinevych also said that the need to change the basic terms of the contract with Steel Mont Trading from CIFFO (Cost Insurance and Freight Free Out, under which the buyer assumes all the unloading costs) to CPT (Carriage Paid To) was due to a failed tender for provision of freight forwarding services. The tender failed because fewer than two bids were submitted despite the fact that bidding was extended by one more month.

"Nobody wanted to participate for one simple reason: the terms of the tender provided for setting prices under the relevant contract in the hryvnia currency while commercial seaports set the prices for their stevedoring services in dollars. As a result, each of these companies could face exchange-rate risks at a time of volatile hryvnia-dollar exchange rates," said Zinevych.

In connection with this and to avoid disruption of the start of the winter heating season, talks were held with Steel Mont Trading and a decision was made to temporarily change the basic terms of the contract to CPT, destination station (thermal power station). "We held another round of talks with Steel Mont and persuaded them to assume these costs. As a result, the terms of the contract were changed from CIF to CPT, destination station, i.e. the price of the coal includes its delivery to the power station. Nobody put a single dollar in his own pocket. On top of the price that I stated, Ukrinterenergo added its own trade markup of USD 2 because we also have to earn money on this operation. In addition, given that Ukrinterenergo obtained a loan of UAH 200 million from Ukrgasbank to finance its 20% prepayment, we have costs associated with banking services," he said.

Thus, excluding discounts and the markup for quality and considering services involving the handling of coal at Ukrainian seaports and its transportation by rail, the coal prices for the ultimate consignee (the Tsentrenergo power company) will be USD 110.35 per ton at the Tripolskaya thermal power plant and USD 112.22 per ton at the Zmievskaya thermal power plant.