Conflict looms over aid rules for coal sector

Date: 23/01/1997

By Chris Johnstone

A battle over what subsidy rules should be drawn up for coal mines in the EU when the current framework expires in 2002 has already been joined by member state governments.

Spain has lodged an early bid with a letter to the European Commission suggesting that government subsidies for loss-making pits be continued as a matter of course for a further three or five years.

Germany is expected to intervene on broadly similar lines as governments square up for a decision this year.

However, the UK is warning of a tough line against an extension of subsidies beyond 2002. “We do not give state aid to mines and would like to see an open market for coal,” said an official.

Germany is biding its time before commenting, waiting for the outcome of talks between the central and regional governments, such as North Rhine Westphalia, which would be worst affected by pit closures.

Under the existing aid guidelines drawn up in 1993, once the European Coal and Steel Community Treaty expires in 2002, subsidies for production costs should only be granted to uneconomic pits on exceptional social and regional grounds.

There is a lot at stake for both Spain and Germany as work on the new aid framework gathers pace. Both are currently pouring millions of ecu into supporting coal production at costs well over world levels.

The German government is committed to granting its hard coal industry subsidies of 3.7 billion ecu this year and again in 1998, slightly down on the 3.9 billion ecu handed out in 1996. Spain was granted approval to give around 800 million ecu to its coal industry in 1996.

German production costs are on average four times the price of imported steam coal, with Spanish expenses about three times as high. Efforts have been made in both countries to cut costs, but these have been cancelled out by a steep fall in world coal prices.

Social and regional arguments motivate the German subsidies. With the average age of its 50,000 miners between 31 and 33 years, early retirement is not a realistic option.

Spain's most threatened mines are in the economic and employment black spot of the Asturias. Many of the most heavily aided companies, such as Hunosa, Minas de Figaredo and Mina de la Camocha, have little hope of turning around and making profits in the short term in spite of the major aid and restructuring plans focused on them.

In contrast, UK costs have fallen steeply since a Draconian restructuring of the industry closed uneconomic mines, concentrated on superpits and expanded open-cast production. Ironically, some of the closed UK pits operated with minimal subsidies which would have made them star performers by continental European standards.

Since 1995, UK production costs have been broadly in line with world coal prices, enabling it to compete for the first time on export markets.

This has already prompted the UK government to launch a behind-the-scenes attack on the heavy subsidies paid to German power companies to take local coal. It says several British coal producers have made bids to supply German energy firms with prices well below local production costs. But they failed to win the contracts once German subsidies for using local coal were included in the calculations.

“We have asked the Commission to investigate whether there is not a possible distortion of trade because of the subsidies,” said an official.

This, however, might not lead to demands that Germany ends its subsidies.

One way out, it is suggested, could be for German coal companies to guarantee to take excess British production.

The UK's biggest coal firm, the privately operated RJB Mining, has not yet seriously tried to invade the European market, but it might be forced to do so if it does not clinch sufficiently large supply contracts with local electricity generators next year.

Spain's dual system for subsidising the coal industry through direct government grants and funds from a levy on all electricity bills (fixed at 4.8&percent; of the bill in 1996) is already under pressure from the Commission. Officials say Madrid has failed to abide by demands that all coal industry subsidies should be clearly shown on central and regional government accounts by 1 January this year.