Jan Cienski in Warsaw -

When a country's prime minister says that a sector's profits aren't important compared to its social and political benefits, you know that you are in deep economic trouble. 

That is the message Poland's Donald Tusk recently gave to his country's troubled coal industry, which in total lost €65m last year and faces a predicted eye-watering loss of €846m this year. “Efficiency in the energy sector does not mean being exclusively concentrated on maximising profits,” Tusk said recently. “In addition to profits there are also social and political aspects.”

The problem for the coal sector is that most of Poland's mines are old and deep. That means that coal is expensive to dig out, and the mines need massive investment to keep them running. Costs and investments also steadily grow as miners tunnel further down to extract coal. “The coal companies are fighting with costs,” Roman Loj, CEO of Katowicki Holding Weglowy, Poland's second largest coal miner, said at a recent industrial conference. “Those costs, as we descend ever lower with extraction, are going to grow.”

That cost structure has made Polish coal increasingly uncompetitive compared with foreign coal from countries like Russia, Chile and South Africa, where much of the coal is dug out in much cheaper open pit mines. Although about 85% of Poland's electricity is generated by coal, and the fuel accounts for about 55% of the country's overall energy mix, power and heating plants are increasingly turning to imports for supply.

European thermal coal prices are now about €57 a tonne, while in Poland unit production costs are almost €72 per tonne. Unsurprising then that last year about 15% of the coal used in Poland was imported. That has left the sector with 15m tonnes of expensively mined coal sitting unsold in storage dumps, at a time when the global coal price is falling. This means the Polish sector's problems are only going to get worse. “This year is going to be a minus and maybe the next two years after that,” says Miroslaw Taras, the CEO of Kompania Weglowa, Poland's largest coal miner. “The key is to restore liquidity and to gain markets. If we can do that the situation may improve.”

Past glories

The coal sector's woes are not just a problem for Taras. With more than 100,000 people employed in Europe's largest coal industry, the politically powerful sector is also a headache for Polish politicians.

The coal industry was a mainstay of communist Poland, employing about 400,000 people a quarter century ago. Since then, several rounds of layoffs and restructuring – at a cost of about €100bn – have closed many unprofitable mines and dramatically reduced the head-count. However, there are still many mines which barely turn a profit. “If there was a sensible way to end the exploitation of mines which have large problems and leave those deposits for future generations, while investing in deposits which are more profitable, then the Kompania Weglowa could become a remarkable company,” Taras says.

Even the normally more profitable hard coal and coking coal sector is in trouble. Jastrzebska Spolka Weglowa eked out a €19.6m profit in 2013 after posting a €235m profit in 2012 and a €500m profit in 2011.

As well as closing unprofitable mines, the coal industry also wants to rework labour contracts, among the most expensive in Polish industry thanks to the sector's powerful unions. While the unions are talking to coal company bosses, there is little sign of a breakthrough in talks.

The coal industry would also like the government to loosen some of the regulations governing mineral extraction and to set clear targets for future coal use, so that mines can tailor their production to actual demand and not overproduce, as happens now.

As Poland is an EU member, that limits the government's ability to subsidise the coal industry, although there may be some sort of an informal approach to repair the sector's balance sheets. “We believe the current problem is very serious and, without support coming from a recovery in global coal prices, the 'fix' is not easy. Assuming that current low coal prices stay with us for the next two years, we see the following potential solutions: i) closing high production cost mines (high political damage and very difficult to conduct), ii) “ask” the power sector to keep buying domestic coal with a large premium to global prices, iii) consolidate coal mines with the power sector,” wrote Rafal Wiatr of Citigroup Research.

The problem is that coal is an emotional and political subject, not just an economic one. Tusk, generally a centrist economic liberal, recently proclaimed that “Poland has stood, stands and will stand on coal”. That is a position which is increasingly difficult to defend on both economic and environmental terms.

Jan Cienski is a Senior Fellow at DemosEuropa, a Warsaw-based public policy think-tank.