Polish coalmining enjoys its good times while they last

Polish coalmining enjoys its good times while they last
The Turow opencast lignite mine near Bogatynia, Lower Silesia. / Photo: CC
By Wojciech Kosc in Warsaw June 23, 2017

Polish coalmining is enjoying good times. The Law and Justice (PiS) government has fulfilled its promise to help mining companies by orchestrating the bailing out of the indebted and loss-making miners and pushing state-controlled energy companies to invest new capital in the sector.

The largely positive market environment, together with the financial restructuring, have enabled Polish miners to turn in decent results in the first quarter.

However, the question remains: can the good times last? Coal – a global commodity – comes under pressure from many sides. The obvious challenge is the international drive to clamp down on the polluting fuel in order to mitigate climate change. The resulting development of renewable energy and gas-fired power plants, as well as progress in energy efficiency, are a visible threat to coal demand already.

According to a recent study by the Polish Academy of Science, demand for coal to burn for power generation in Poland will diminish by 6.9mn-9.6mn tonnes by as early as 2020. That is 25% of production by Poland’s biggest miner PGG.

There also is a more immediate pressure of volatile domestic demand that can shift to imported coal if its prices turn favourable compared to those offered domestically. Coal imports to Poland rose by an estimated 200,000 tonnes – or 3.5% y/y – to 5.9mn tonnes in January-October 2016, according to data from the state Industrial Development Agency (ARP).

The imported coal comes to Poland mostly from Russia. Currently, Russia is selling the bulk of its coal output to China. However, as soon as China’s plan to reduce coal consumption in the name of fighting global change takes off, the Chinese demand will fall, and Russian companies will start looking for other markets to sell to.

Russian coal company SUEK, for example, is already looking to double sales in Poland after increasing sales by 30% last year, it said in its 2016 annual report. Russian coal is cheaper and – arguably – of better quality than its Polish equivalent. Russian companies are so confident they can beat Polish competition that some of them – such as another giant KTK – are taking part in tenders for coal supply organised by local authorities across Poland, energy sector analysis website wysokienapiecie.pl reported in late May.

If demand trends for domestic coal play out in line with forecasts, Polish miners are not only going to face problems with sales but also with finding money to invest in new supply.  The investment plans are huge. PGG, for example, plans capex of PLN20bn by 2030.

Without new supply, Poland – if it wants to stick to coal as its staple fuel – will have to import more and more. That runs counter to the government’s rhetoric of energy self-sufficiency. It might also mean the incentive to develop renewable energy, gas or nuclear power will strengthen, though there is little to indicate that so far. Renewables are stalled, while plans for Poland’s first nuclear power plant are still at too early a stage to discuss the likelihood of the project.

For now, however, thanks to the government’s efforts and to the relatively good situation on the coal market, the key companies – PGG and Warsaw-listed JSW – could boast improved results in the first quarter.

PGG posted a net profit of just over PLN59mn (€14mn) in the first quarter on the back of reduced costs, improved efficiency, and offloading superfluous assets to the state-owned restructuring vehicle SRK. The company managed to post positive results in spite of coal price trending down in the first quarter after China upped its domestic production, reducing demand and flattening prices.

JSW fared much better. The company produces coking coal for the steel industry. Unlike coal that PGG extracts for power generation, coking coal is much less replaceable and as the global economy is accelerating, the price of coking coal rises accordingly. With the price of JSW’s coking coal surged 162% y/y in the first quarter, the company posted an operational profit of just over PLN1bn.

The PiS government wants to reinforce the position of coal in Poland not just because it still is the dominant energy source in Central Europe’s largest economy. The industry that employs some 85,000 people could, if stirred the wrong way, threaten political stability in next to no time. Warsaw’s putting a brake on the development of renewable energy’s most vibrant segment – wind power – was seen as an attempt to rid coal of a rival branch negatively affecting demand.

But Polish miners still appear unprepared for the likely shape of the coal market in the near to mid-term, and have yet to undertake any radical operational restructuring.  Overmanning is still rife. For example, state coalmines produce around 600 tonnes of coal per employee, versus 1,000-1,500 tonnes in privatised mines in Silesia and Bogdanka.

A taste of what is to come can be found, paradoxically, in a report by the state audit body NIK on the state of the mining sector in 2007-2015. The report said that Poland did not take advantage of a good situation on the coal market in the early 2010s, which led to rapid deterioration of miners’ standing after 2012, when sentiment soured.

Today, Polish miners are turning in profits again, talking about huge investments, and seem to disregard the signals of diminishing demand.

“The worsening of the sentiment that began in 2012 exposed the biggest producers’ inability to run business profitably and a total lack of preparation for a drop in the price of coal and in demand,” NIK said in the conclusion to the report that may well constitute a peek into the near future of Polish mining.

 

 

 

 

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