Battle likely over coal subsidies

Date: 29/06/2000

By Peter Chapman

A European Court ruling last year that firms must make significant cuts in their production costs to qualify for government subsidies is casting doubts on billions of euro of planned new aid to Germany's coal industry.

The warning from industry experts comes as the European Commission is scrutinising the latest application for approval for subsidies to the troubled industry, designed either to help improve the long-term viability of loss-making pits or close them down altogether. They say Berlin is seeking clearance for payments to its industry close to last year's €4.2 billion, of which €2.6 million was 'operating aid' to prop up loss-making pits and the other €1.6 billion helped to pay for shutting other, less economical mines.

A decision is not expected until after the summer break, but sources say Germany's chances of winning Commission approval for the full amount are slim if the institution acts in accordance with a ruling made last year by the European Court of Justice.

The warning follows recent comments by Karl Starzacher, chairman of German mining and industrial giant RAG Group, who said at the company's annual general meeting that he was "happy" the firm had "managed to freeze production costs at €143 a tonne" and added that RAG Group's Deutsche Steinkohle unit, which controls the lion's share of German mining, would never be able to match the €35.79 per tonne price of imported coal without state subsidies.

The ECJ ruling which could dash his hopes of more aid resulted from a complaint to the Court about previous handouts to German mines lodged by the UK's largest firm RJB Mining. The ECJ rejected RJB's claim that the payments were in breach of the EU's coal industry state aid code, which expires in 2002, acknowledging that European firms would always struggle on the world coal market "for structural reasons".

But crucially, it added that companies receiving operating aid must do more than freeze production costs - and must instead reduce those costs significantly from one year to the next. The ECJ said that if production costs did not fall in a given year, for "overriding reasons", the reduction should be "commensurately more" in subsequent years. "One of the striking elements of the ruling was the question of defining what is meant by cost decreasing: the court said it could not be symbolic," said a source. "Clearly the ruling forces the Commission to be more stringent."

The focus on German aid comes as Spain and the UK are also seeking approval for subsidies to their own industries. Sources said Spain was asking for clearance for aid "just below" the €728 million total it paid last year, while the UK - which has for years refused to subsidise its industry - is expected to file its plans for a two-year €160 million operating aid package for the industry later this month.

British firms claim they need the short-term aid to offset distortions to the British market caused by far higher subsidies elsewhere - notably Germany, Spain and Poland - and to shield the sector until world coal prices rise.

A European Court ruling in 1999 that firms must make significant cuts in their production costs to qualify for government subsidies is casting doubts on billions of euro of planned new aid to Germany's coal industry.