Syndicate and its Impact on the Development of Russian Coal Mining Industry. The Late 19th – Early 20th

Century. Methods of Analysis and Results

Tamara Izmestieva

Moscow, Russia

Introduction

The late 19th - early 20th century: emergence of large-scale enterprises in Russian coal industry.

Crisis (1901-03) ==> Competition between large-scale enterprises became very keen and destructive.

What was the way out? Emergence of the syndicate (Produgol') on coal market

(February, 1906). The syndicate created favourable conditions for both

survival and development of coal mining enterprises. A special group of enterprises which could enjoy

increasing returns to scale appeared under "umbrella" of Produgol'.

The aim of this report is to investigate this group.

Methods of analysis

Our research may be divided into three parts:

– Revealing enterprises for further consideration.

– Financial (cost) analysis of these enterprises.

– Investigation of the effects of Produgol' on these enterprises.

Part 1

The goal of the firm is profit maximization. Profit could be expressed as follows: [1]where Pr is profit, R - revenue, C - costs of production, P - coal prices, Q - output.

We can calculate a scale economies index (SCI) as follows: [2]where

(elasticity of cost with respect to output), C - costs of production, Q - output.

CQPCR Pr

cESCI 1

)//()/( QQCCEc

Application of a scale economies index (SCI)

These indexes allow us to discern those firms, which took advantage of economies of scale. We selected those enterprises for which scale economies index was equal more than zero.

So, these indexes help us to reveal enterprises for further consideration.

EC SCI Comments

1 0 no economies of scale

>1 <0 decreasing returns to scale

<1 >0 increasing returns to scale

Part 2

Our analysis is based on decomposition of total costs into fixed costs and variable costs:

Problems of estimating the two components of total costs. ==> Applying an approximate method.

Decomposition of total costs helps us to formulate a cost equation:

where Profit = 0, c – fixed costs, a – average variable costs per unit of output, Qk – output (volume of production).

This equation determines costs’ structure of an enterprise and reflects its potential production capability.

vf CCC

kk QacR

Part 3

Introducing in our analysis two external factors - prices and production limits, which were under control of the syndicate.

Cost equation may be rewritten thus:

Computation of prices was based on average costs per unit and profit percentages.

Rate percents we used were as follows: 5%, 8% and 20%. Using this formula we can calculate output, which would

ensure a planned profit. Finally, we compare this output with real output (and volume of realized coal).

aPc

Q

Algorithm of analysis:

1. Calculation of scale economies indexes. 2. Selection of maximum volume of production with its

associated costs of production. … 14. Computation of the difference between estimated level

of production and volume of realized coal.

So, the framework of our research includes 14 steps. Although each step of analysis is rather simple, this procedure as a whole is cumbrous and tedious. I created in Excel a special template, which makes it possible to perform these operations automatically.

Template for cost analysis

Ekaterinovka Coal Mining Company

Years

Output (in millions of poods)

Total costs of production (in millions of poods)

Realization of coal (in millions of poods)

Average cost per unit (roubles for pood)

Price 1st with 5% profit (roubles for pood)

Critical Output (CO5) (in millions of poods)

1906 41,4 3,287 19,9 0,079 0,083 37,91907 51,8 3,970 25,4 0,077 0,081 40,31908 54,4 4,466 15,8 0,082 0,086 35,71909 53,6 4,803 28,9 0,090 0,094 30,81910 42,0 3,994 20,3 0,095 0,100 28,01911 49,5 3,440 20,6 0,070 0,073 48,71912 50,3 3,360 20,7 0,067 0,070 52,81913 59,0 3,894 50,1 0,066 0,069 54,11914 62,1 4,043 51,2 0,065 0,068 55,8

Max Year Min Year Max - MinOutput (in millions of poods) 62,1 1914 41,4 1906 20,7Total costs of production (in millions of poods) 4,04271 1914 3,28716 1906 0,8

Average variable cost per unit (roubles per pood) is equal 0,0365 R = 1,77606 + 0,0365*Q

Maximum MinimumTotal variable costs (roubles) 2,26665 1,5111Total fixed costs (roubles) 1,77606 1,7761

Elasticity of cost with respect to output 0,4597

Scale economies index 0,5403

Increasing returns to

scale

Example of template usage

Ekaterinovka Coal Mining Company

Price 1st with 5% profit (roubles for pood)

Critical Output (CO5) (in millions of poods)

Excess of output over CO5

Excess of coal realization over CO5

Price 2nd with 8% profit (roubles for pood)

Critical Output (CO8) (in millions of poods)

Excess of output over CO8

Excess of coal realization over CO8

Price 3d with 20% profit (roubles for pood)

Critical Output (CO20) (in millions of poods)

Excess of output over CO20

Excess of coal realization over CO20

0,083 37,9 3,5 -18,0 0,086 36,1 5,3 -16,1 0,095 30,2 11,2 -10,30,081 40,3 11,4 -14,9 0,083 38,3 13,4 -12,9 0,092 32,0 19,8 -6,60,086 35,7 18,7 -19,9 0,089 34,0 20,4 -18,2 0,099 28,6 25,8 -12,80,094 30,8 22,8 -1,9 0,097 29,5 24,1 -0,6 0,108 25,0 28,6 3,90,100 28,0 14,0 -7,7 0,103 26,8 15,2 -6,5 0,114 22,9 19,1 -2,60,073 48,7 0,8 -28,1 0,075 46,1 3,4 -25,5 0,083 37,9 11,6 -17,30,070 52,8 -2,5 -32,1 0,072 49,8 0,5 -29,1 0,080 40,7 9,6 -20,00,069 54,1 4,9 -4,1 0,071 51,1 7,9 -1,0 0,079 41,6 17,4 8,50,068 55,8 6,3 -4,6 0,070 52,5 9,6 -1,3 0,078 42,7 19,4 8,5

Example of template usage (cont.)

Some results of computation (1)

Elasticity of cost with respect to output (ECO) for members of “Produgol’”FirmsNum

ber

ECO FirmsNum

ber

ECO FirmsNum

ber

ECO FirmsNum

ber

ECO

1 1,02 7 0,62 13 1,98 19 1,232 1,02 8 0,53 14 1,54 20 1,413 1,13 9 0,91 15 1,31 21 1,014 1,10 10 0,47 16 1,03 22 1,425 0,46 11 0,47 17 1,28 23 1,236 2,22 12 0,76 18 1,14

Notes: (a) enterprises which acted “under umbrella” of Produgol’ throughout the whole lifetime of this syndicate are marked by grey colour. (b) bold design indicates cases of increasing returns to scale.

Some results of computation (2)

№ Name of firm Cost equation

5 Ekaterinovka Coal Mining Company R = 1,78 + 0,0365*Q

7 Coal&Solt Mining Company R = 0,90 + 0,0472* Q

8 Nikitov Coal Company R = 0,29 + 0,0373* Q

9 South Russian Coal Company R = 0,24 + 0,0597* Q

10 Russian-Donets Company R = 1,45 + 0,0383* Q

11 Rutchenko Mining & IndustrialCompany

R = 1,54 + 0,0429* Q

12 French-Russian Company of Berestovo-Krinka Coal

R = 0,25 + 0,0516* Q

Some results of computation (3)

Results of comparison between real output (QR), real sales (QS) and estimated output QEst which would ensure 5% (8%, 20%) profit for Ekaterinovka Coal Mining Company

Year QR – QEst

5%QS – QEst

5%QR – QEst

8%QS – QEst

8%QR – QEst

20%QS – QEst

20%

1906 3,5 -18,0 5,3 -16,1 11,2 -10,31907 11,4 -14,9 13,4 -12,9 19,8 -6,61908 18,7 -19,9 20,4 -18,2 25,8 -12,81909 22,8 -1,9 24,1 -0,6 28,6 3,91910 14,0 -7,7 15,2 -6,5 19,1 -2,61911 0,8 -28,1 3,4 -25,5 11,6 -17,31912 -2,5 -32,1 0,5 -29,1 9,6 -20,01913 4,9 -4,1 7,9 -1,0 17,4 8,51914 6,3 -4,6 9,6 -1,3 19,4 8,5

Summary

We considered a special group of those enterprises, which potentially could enjoy increasing returns to scale.

We studied influences of both internal and external factors on enterprises. We used cost analysis to examine internal effects on an enterprise.

The operating sequence of our analysis was written as an algorithm. We created in Excel a special template to execute the algorithm automatically.

We analysed a special group of those enterprises, interests of which coincided with interests of the development of Russian coal industry as a whole, in terms of coal deficit in the country. As analysis showed Produgol’ frustrated this coincidence. Produgol’ became an obstacle to production improvement.