Poland's coal mines turn red again

By bne IntelliNews June 14, 2007

Jan Cienski in Warsaw -

Poland's coal mines did an unusual thing a few years ago – they started to make money - which is why they are now in serious trouble.

The problem is that the politicians who control the state-owned mines thought that the mines had permanently turned the corner. When Lech Kaczynski was campaigning to be president on Poland two years ago, he ridiculed the idea of selling off the mines because they were earning the state a fat profit.

Fast forward to this year and Kompania Weglowa, Europe's largest coal mining company with 17 mines, 70,000 employees and extraction of about 55m tonnes of coal a year, is back in the red.

Two smaller state-owned mining companies – saddled with fewer ancient and loss-making mines than Kompania Weglowa – are still making a profit, but the larger miner reported a loss of PLN61.8m (€16m) in the first four months of this year, and analysts fear that losses could come to as much as PLN200m this year. Losses last year were PLN73m.

Its two profitable years were 2004 and 2005, when it turned around years of losses and made a total profit of about PLN690m, much of which was handed over to workers in bonuses. But those two fairly fat years were an aberration that fooled the company's political masters and now the losses are mounting.

One big problem is the fast rising wage demands from miners, who are seeking an increase of 4.5% this year – coincidentally the same amount by which labour productivity in the mining sector has fallen over the last year.

Another is that demand for coal is falling, despite stable prices. Because the domestic market cannot absorb more coal, the company is subsidising coal exports, spending about PLN40 for every tonne shipped by sea to very wealthy countries like Belgium, Denmark and France. Losses for this sort of business activity are expected to come to PLN160m this year.

That sales strategy smacks of the business reasoning of communist Poland, where coal was one of the country's only sellable exports. In its hunger for foreign currency, needed to buy consumer goods to forestall a workers revolution, the Communist Party shipped enormous amounts of coal to the West at a loss.

The rest of Poland's economy has changed beyond recognition since 1989, but coal remains the same: inefficient, loss making, but politically very powerful.

Favoured class

During communist times, coal miners were the favoured proletarian class, with special shops that stocked goods unavailable in the rest of the country. They still have a way with politicians. In 2005, thousands of angry miners brandishing axe handles descended on the Polish parliament, prompting the cowed politicians inside to vote through a fat early retirement package that applies only to miners.

Since 1989, the government, together with institutions like the World Bank, has spent more than PLN4bn to restructure the industry. In 2003, PLN18bn of industry debt were remitted. But Kompania Weglowa still owes more than PLN4.5bn and has no money to modernize and upgrade its mines. Employment in mines was slashed from 400,000 and is now less than 100,000 and the number of working mines was cut from about 80 to 30.

But miners are resisting further cuts, and the government is doing little to push them. The governing Law and Justice party is distinctly wary of privatization, and has made it clear that only about 30-40% of the mining companies will be floated on the stock exchange. The first flotations were expected next year, but that now looks impossible because very little planning work has taken place.

The government is expected to release its long-term coal mining strategy later this month, but the plan is not expected to be at all radical. Kaczynski, now Poland's president, has very close contacts with miners' unions, who helped get him elected, and so, as with communist Poland's leaders who never dared cross miners, today's miners are likely to continue on the state dole for the foreseeable future.

That is a shame, because there are several foreign firms interested in taking over the mines and investing in them. One foreign investor that has expressed an interest is New World Resources, an energy holding company that is the sole shareholder in the Czech Republic’s largest hard coal mining company, OKD.

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