Ukraine's mining industry continues to muddle through a protracted process of restructuring, which in 2011 led it to simultaneously sign major deals with China on revamping coal mines and cooperate with the EU on shutting down its non-productive mines. Although the lack of political resolve and consensus continues to hamper privatisation plans for the country's state-owned mines, progress is being made on the sell-off. In contrast to a steady economic growth outlook in Ukraine over the coming years, we forecast an average real annual mining decline of 2.1% over 2011-2016, reaching US$10.1bn in 2016, from US$11.4bn in 2011.

All Ukrainian state-run mines will be privatised by the end of 2012 in a move announced by the Ukrainian Coal Industry Ministry in October 2010. Coal minister Yuriy Yaschenko outlined plans for the State Property Fund and said that the starting price of the companies will depend on their capital. A EUR8.9mn (US$12.89mn) facility provided to Ukraine by the EU in June 2011 was partly designed for this end. The funds are expected to be used to support mine privatisation efforts, with an eye towards eventual closures.

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Indeed, the EU-backed Coal Sector Policy Support Programme concluded that Ukraine should shut down 29 of its non-productive coal mines by 2016. Additional mines may be included in the cull, however, if a follow-up study is conducted in 2012 and 2013. In any case, the mine closures - expected to take 15-24 months for an individual mine - will carry a direct cost of around UAH4bn (US$495.07mn).

Meanwhile, we believe that a coal agreement signed between Ukraine and China in September 2010 will not have a significant impact on Ukrainian coal production in the short term. Looking ahead, however, we believe the agreement could go some way in enabling Ukraine to become completely self-sufficient in coal and bring an end to the country's dependence on imports to satisfy most of its petroleum and natural gas demand.

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