Digging deep for profit in UK collieries

Date: 28/11/1996

By Tim Jones

THE very idea of running a large-scale private coalmining company without subsidy and at a profit is hardly imaginable to most continental Europeans.

The soaring production costs of mining increasingly deep deposits have slowly killed off the traditional coal industries of Germany, France and Spain. Restructuring and mine closures have halved the workforce as the industry struggles to compete with cheap alternative ways of producing electricity with nuclear energy and gas.

The German, French and Spanish industries have been kept afloat by massive subsidy; 10 billion ecu was cleared by the European Commission in April with most of this going to German pits.

The story in the UK could not be more different. The strength of the powerful miners' union was broken, after a historic national strike in 1984-85 failed to halt the government's ambitious pit closure and privatisation plan.

Since then, the British industry has been sold into private hands. Richard Budge's RJB Mining bought all 19 of the remaining English mines for an unexpectedly high 950 million ecu.

Since then, this plain-speaking northerner has surprised many people by managing to run a profitable coalmining company. For this, he believes he has the state to thank.

“It is simply because the collieries we purchased from British Coal were very well developed,” he says. “A lot of capital investment was made by the state over the past ten years and the manning levels are down to numbers that are very close to being viable. We are continuing the process of cost reduction and multi-skilling. We are doing a small amount of de-manning, but the changes are mainly about motivation.”

Budge adds: “We are not miracle workers. “We did not change things within 12 months. We set ourselves a programme of three years after the acquisition to complete the process.”

The first year of the expanded RJB Mining was dominated by the integration of a 50-year-old state-run administration with a private-sector opencast mining company.

“We always said it would take three years to make the changes in the mentality of the employees,” he says. “Mostly, the differences in attitude are about ownership. The funny thing is that when the employees worked for the state, they did not feel they owned the company even if, in theory, they did. But now, they do feel they are starting to own it.”

The company introduced schemes such as issuing matching shares to workers who bought equity in the firm and a save-as-you-earn programme offering share options at half the current market price. “Now they really do feel some kind of ownership and they are very much more involved in decision-making,” says Budge.

A workforce which had already made great productivity strides in the final years of public ownership continued the trend under its new master, who was able to introduce flexible working methods that would have been impossible before the strike.

“Next year, we should be reaping the benefits of cost reductions, which will put the company in a strong financial position to renegotiate the generator contracts in 1998,” he says.

1998 will be the key year for Budge and the company. Even though subsidies have officially been banished from the UK coal scene, RJB has until now benefited from a deal made with the government at the time of privatisation.

The electricity power generators, PowerGen and National Power, were obliged to take out long-term contracts for the supply of coal from RJB - but only until 1998. Then Budge will have to compete with gas-powered stations built by the generators and world coal.

He seems unbothered by this. “Historically, these negotiations are done five minutes before midnight. Although contracts are very thick documents, it is only a matter of agreeing three things: price, tonnage and duration. That can be done very quickly.”

While the generators are bound to make noises about not needing UK coal after 1998, they will want it, claims Budge. He says he can offer them a secure supply of coal at a cheap rate of 1.80 ecu per gigajoule (GJ), producing power at 0.23 ecu per kilowatt hour, compared with the cheapest gas at 0.33 ecu.

“The generators make more profit from burning UK coal,” he says. “They have a strategic supply in sterling, rather than dollars, and no volatility of price. Environmentally, the supply is adjacent and means lower transportation costs.”

Although he is about to be let loose into the savage world of free competition, Budge is perplexed but relaxed about having to compete with subsidised German coal.

“I do not understand the policy in Germany - why they think it is worth spending so much money to prop up the coal industry. But it is up to them to decide whether they can afford it. It is their taxation and not ours. But I do know for a fact that if Britain had privatised coal earlier than it did, there would be more collieries open today,” he insists.