Kohl faces dilemma over coal

Date: 27/03/1997

By Tim Jones

WHEN he promised 250 million ecu in extra subsidies to Germany's coalminers, Chancellor Helmut Kohl may have bought industrial peace but his problems with other EU member states were only just beginning.

Unlike other European countries, Germany still has a huge coal-producing sector which accounts for almost one-third of its energy needs. The antagonism of large swathes of the population towards nuclear energy - evidenced once again by the recent protests against waste-dumping - simply reinforces the need to maintain a thriving coal industry at whatever cost.

And the cost is high. The federal chancellery pays 65,000 ecu a year for every job in coalmining.

This is the reason why the government pushed for a radical plan to scale back the industry, but also explains why it failed. After three days of industrial action and fighting on the normally placid streets of Bonn, Kohl caved in and pledged to make his cuts as slowly as possible.

Subsidies will be reduced from 4.6 billion ecu now but, by 2005, the level of aid will have fallen to just 2.8 billion ecu instead of the 1.9 billion ecu originally envisaged. Moreover, the programmed redundancies, which had been expected to amount to 60,000 jobs out of a total 85,000 in the industry, will now be halved, and these will be negotiated and not imposed.

“We are not jumping for joy. However, we have an agreement which allows the coal industry to exist after 2005,” says Hans Berger, the president of the miners' IGBE labour union.

It really is as stark as that. The coal industry in Europe has shrunk like almost no other. Germany had 500,000 miners in the Fifties compared with 85,000 today. This trend has accelerated over the past decade, beginning with the job-shedding aftermath of the year-long national miners' strike in the UK in 1984-85.

Since 1990, nearly 70,000 jobs have been lost in the coal sector throughout the main producing countries in the EU: Germany, France, Spain and the UK. Imports of coal have risen by 5 million tonnes, while European production over the past ten years has fallen by 100 million tonnes - close to 50&percent;.

At the root of the industry's problems is the continued high price of producing coal despite years of vicious restructuring which have cut costs by one-quarter over the past five years alone. Even now, according to figures from the European Commission, the average cost of producing coal in the EU - measured as tonnes per coal equivalent (TCE) - is 114 TCE, whereas average imported coal prices are as low as 40 TCE.

Even though Europe has 250 more years of coal reserves, many of these are to be found in deep deposits which need to be mined at more than 1,000 metres and require tough and expensive equipment. At the same time, electricity generators are opting to build gas-powered stations which produce power at a lower cost.

As a result, the number of jobs in coal production has collapsed while productivity has soared by 60&percent; over the past decade. Spending by the industry has concentrated on new mining technologies to get the best from the deep seams, and opencast mines have become more popular.

The UK example provides a test case of what happens to a European coal industry without subsidy. After the 1984-85 strike, the state-owners were able to carry out a massive restructuring programme culminating in the sale of the remaining 19 English pits to RJB Mining in 1994 for 950 million ecu.

With the government poised to end the levy which finances the operation of the nuclear industry this year, the UK will no longer subsidise any of its power sources.

Even after this revolution in the industry, analysts question whether RJB Mining is viable given that it still benefits from government guarantees that power-generators PowerGen and National Power will buy coal.

When this guarantee expires next year, RJB's Richard Budge will have to convince these two companies that they are best-served by staying with coal.

He argues that his unsubsidised coal is more attractive than oil and gas to the generators. It will produce cheaper energy, is close to the generators and does not need to be transported from a distance, and it can be paid for in sterling rather than dollars.

Budge advocates every European coal industry going down the same route as the British so as to provide this naturally cheap and strategically secure fuel to industry. “The problem with Europe is that, if we are not careful, we will become over-dependent on imported gas. Eighty per cent of those reserves will be in Russia, Algeria and the Middle East - not necessarily the most secure and stable countries in the world to be getting our long-term energy from,” he says.

But, considering Kohl's recent action and a surprisingly large subsidy package given to the Spanish industry in February, Budge's special pleading seems to be falling on deaf ears.

At the moment, the Commission is pressing for a new code for member states wishing to provide aid to the coal sector once the existing guidelines expire in 2002. Spain has already requested that subsidies to loss-making pits be sustained for a further five years after the code ends.

Madrid operates a system for subsidising the coal industry through direct government grants and funds from a levy on all electricity bills, which was fixed at 4.8&percent; of the total last year.

The Commission has put pressure on the government to modify these practices while, at the same time, Germany will have to explain its decision to slow the rate of aid cuts.

When the Commission cleared 7 billion ecu of subsidies to the German coal industry in 1995 - including 4 billion ecu to cover payments to mines for coal for electricity generation and 1.3 billion ecu for the supply of coal and coke to the steel industry - it claimed that the rate at which Germany planned to reduce aid was not fast enough. Now, it will be even slower.

The UK government is already squaring up to make a complaint about the move, and wants the aid rules tightened up.

Over the past two years, UK output costs have been in line with world coal prices, enabling the industry to compete on export markets. But London has protested that subsidies paid to German power companies to buy local coal has distorted this market to the disadvantage of UK producers.

Several of them, says the government, have bid to supply German generators with coal priced well below local levels, but they failed to win the contracts once subsidies were taken into account.

The widely anticipated arrival in government of the opposition Labour Party in May is unlikely to change London's approach.

It is true that the party fought the post-1985 restructuring of the industry. But now it is done, Labour feels it must defend the country's remaining coalminers rather than those in Germany or Spain.

The existing aid guidelines, which were agreed four years ago, state that subsidies to offset production costs should only be granted to uneconomic pits on exceptional social and regional grounds after 2002. The European Coal and Steel Community treaty expires on the same date.

After that, it is likely that German and Spanish miners will have to compete in the same market as what remains of their British counterparts.