Polish government looks to utilities to bail out miners

By bne IntelliNews November 21, 2014

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Poland's mining woes are so serious - yet the industry is so vital to the country's  energy security - that the most recent effort to save the sinking sector counts on help from the state-controlled but also partially listed power utilities.

Poland’s Treasury Ministry said this week that part of the government's plan to restructure the ailing sector would involve power utilities buying mining assets, news that caused falls in the stock prices of the two biggest power companies, Polska Grupa Energetyczna (PGE) and Tauron.

Whether the utilities will be forced to take part in the restructuring of the politically sensitive sector should become clearer in about three weeks, the time given to Wojciech Kowalczyk, the government’s appointee to spearhead the rescue effort, to come up with a detailed plan.

The Treasury Ministry said that the restructuring will have to be “deep“ and making utilities buy mining assets would not be the only solution applied.

Polish coal mines posted a PLN 772 million (€183 million) net loss in the first half of 2014. That’s a sharp drop compared with the minute profit of PLN 16 million (€3.8 million) a year before, according to the Economy Ministry.

The sector is struggling because of the downturn in  European coal markets caused by  the sluggish Eurozone economy, which has hit coal prices. Warsaw’s big problem is that coal producers employ more than 100,000 people in Poland. With the ruling Civic Platform’s popularity fading, and a general election due by October 2015, the pressure is on.

The sheer number of people employed by the miners, plus the fact that Poland gets about 80% of its electricity from coal-fired power plants, have made the struggling coal mining sector as much a political problem as it is economic.

However, the economics - which are also linked to environmental issues – has already upset the government's plans.  Kompania Weglowa (KW), Europe’s largest coal mining company, as well as peer JSW, both scrapped planned bond placements this month, baulking in the face of demands by investors that they pay a 10-12% yield.

The rescue plan for KW now heavily depends on the company finding someone to buy assets. If it fails, it will have little choice but to shut down mines. One deal is already agreed. Kompania Weglowa will sell four mines to state-owned coal trading company Weglokoks for PLN 2.5bn (€594 million).

According to Tobiasz Adamczewski, energy policy expert at environmental group WWF, the Polish coal mines have found themselves unable to compete on the global commodity market.

"This means that even though the EU is moving away from this resource in the context of the 2030 agreement, competitive mines should be able to export their coal abroad, at least in the medium term,” Adamczewski says.

However, whatever can be done to save the mining sector now is likely to be no more than a temporary solution. According to Adamczewski, the EU’s climate and energy policy, which was agreed in late October in Brussels, will give Poland’s coal mining only more headaches in the future.

“In the long-term perspective, with more global pressure to reduce the use of coal for environmental reasons, this sector needs to realise that it doesn’t have a bright future ahead. This also needs to be understood by investors and pension fund administrators that the time to divest is now,” Adamczewski says.

“However, the biggest pressure is on Polish politicians who need to face the coal mining unions and honestly tell them that time for change has come. And thanks to the climate and energy package and revenues from the sale of CO2 allowances, Poland can create new jobs in innovative sectors, such as renewables and energy efficiency,” adds Adamczewski.

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