Light at the end of the tunnel
Poland's beleaguered coal industry has much to celebrate at the moment. Following a lengthy program of difficult but necessary restructuring steps, it has recorded almost zł.1.6 billion in profit so far this year.
And according to analysts, the sector is poised on the brink of at least five years of strong demand that is likely to see full privatization sooner rather than later. Details of the Treasury's plans to float the sector are due to be presented to the Cabinet this week.
But industry chiefs who for years soaked up giant state subsidies to record embarrassingly large losses should not rest too comfortably on their laurels, because the sector's success has come in large part from the influence of external factors.
Fuelled by industrialization in China, commodity prices have accelerated to leave Poland, among many others, riding high on the wave of demand for coal. This, coupled with the government's scrubbing of zł.18 billion in debts last year, has unshackled the industry from years of grinding debts that have resulted in drastic under-investment.
The Mining Trade Industry Chamber's spokesperson, Janusz Olszowski, is keen to emphasize though, that reorganization laid the foundations for financial success. "These profits are not only because of rising prices but also a consequence of the 13 years of restructuring that have taken place," says Olszowski.
The World Bank's mining advisor John Strongman agrees that the sector deserves credit for its achievements. "Poland has made very positive strides in terms of cutting back excess capacity, improving productivity and reducing the size of its workforce.
"What has significantly changed the picture has been very strong coal prices, especially for exports. So where this year one might have expected the industry to start to show profit, it has become substantial."
Since the beginning of the year domestic prices have risen by 19 percent, while export prices have increased by as much as 100 percent. In September the price of Polish coal stood at zł.190 per tonne, compared to zł.151 per tonne a year ago, but in the export trade, coal is commanding zł.223 per tonne compared to zł.118 last year.
It is expected that the price will continue to boom for the immediate future, with coke coal increasing by some 40 percent. "Good market and prices for coal should remain for the next two years," Olszowski predicted.
The industry's best results belong to coking coal production, the world's most sought-after type of coal, where Jastrzębska Spółka Węglowa recorded a net profit of zł.1.2 billion.
The restructuring that Olszowski highlights has been considerable. Since the early 90s when the process began, employment has been reduced from 400,000 to the current level of around 140,000 and big strides have been taken to close high-cost, excess capacity. It is estimated that an additional 20,000 posts still need to be cut.
Despite this year's bright results, the industry isn't out of the financial woods yet. The mining companies still carry liabilities of around zł.7.3 billion. Payment of zł.3.2 billion of those debts has been spread over the next six years, while a further zł.164 million is due to be cancelled. And the sector certainly isn't free of state aid. This year the coal companies have been granted zł.701 million, with zł.126 million earmarked for closing mines and zł.395 million designated for voluntary redundancy schemes.
Maksymilian Klank, the president of Kompania Węglowa (KW), which controls 21 mines and employs 73,000 miners, says they will be dependent on aid for some while. "So far restructuring is impossible without state help. Losses from previous years caused a standstill in investments. Now we have to make use of good times and invest in the future, so that the taxpayers don't have to support us anymore," Klank said.
Government officials are now devising strategies to recapitalize KW to enable restructuring ahead of privatization. Last week strategists revealed their plan to pump zł.900 million into KW by allocating shares from companies such as Jastrzębska Spółka Węglowa.
Even though Poland has made considerable advances, productivity is still relatively low on the global scale- between a fifth and a tenth of the productivity seen in South Africa, the U.S. and Australia (see graph). Part of this is inevitable because Polish mines are very deep (while the more productive operations are open cast or shallow), and part of this is a result of massive under-capitalization.
But the World Bank's Strongman says Poland is well placed in the market to offset this. "One of the great benefits of Poland is its position in Europe. The industry is nowhere near as productive as the Unites States or Australia. But what protects Poland's coal industry is the transport costs. Poland can still be competitive in the European market."
Strongman says Poland must capitalize on its current position-but he has a warning. "We now have an industry that has made considerable strides on the road to reform. Along with that it is also beginning to take environmental issues seriously. In total it has a pretty positive story to tell.
"The industry must not become complacent because there is a short-term commodity price boom. At the moment there is an opportunity to continue improving production and create an attractive window for privatization.
"The industry is far better placed now than last year and privatization could take place somewhere between the end of next year and 2006."
And according to analysts, the sector is poised on the brink of at least five years of strong demand that is likely to see full privatization sooner rather than later. Details of the Treasury's plans to float the sector are due to be presented to the Cabinet this week.
But industry chiefs who for years soaked up giant state subsidies to record embarrassingly large losses should not rest too comfortably on their laurels, because the sector's success has come in large part from the influence of external factors.
Fuelled by industrialization in China, commodity prices have accelerated to leave Poland, among many others, riding high on the wave of demand for coal. This, coupled with the government's scrubbing of zł.18 billion in debts last year, has unshackled the industry from years of grinding debts that have resulted in drastic under-investment.
The Mining Trade Industry Chamber's spokesperson, Janusz Olszowski, is keen to emphasize though, that reorganization laid the foundations for financial success. "These profits are not only because of rising prices but also a consequence of the 13 years of restructuring that have taken place," says Olszowski.
The World Bank's mining advisor John Strongman agrees that the sector deserves credit for its achievements. "Poland has made very positive strides in terms of cutting back excess capacity, improving productivity and reducing the size of its workforce.
"What has significantly changed the picture has been very strong coal prices, especially for exports. So where this year one might have expected the industry to start to show profit, it has become substantial."
Since the beginning of the year domestic prices have risen by 19 percent, while export prices have increased by as much as 100 percent. In September the price of Polish coal stood at zł.190 per tonne, compared to zł.151 per tonne a year ago, but in the export trade, coal is commanding zł.223 per tonne compared to zł.118 last year.
It is expected that the price will continue to boom for the immediate future, with coke coal increasing by some 40 percent. "Good market and prices for coal should remain for the next two years," Olszowski predicted.
The industry's best results belong to coking coal production, the world's most sought-after type of coal, where Jastrzębska Spółka Węglowa recorded a net profit of zł.1.2 billion.
The restructuring that Olszowski highlights has been considerable. Since the early 90s when the process began, employment has been reduced from 400,000 to the current level of around 140,000 and big strides have been taken to close high-cost, excess capacity. It is estimated that an additional 20,000 posts still need to be cut.
Despite this year's bright results, the industry isn't out of the financial woods yet. The mining companies still carry liabilities of around zł.7.3 billion. Payment of zł.3.2 billion of those debts has been spread over the next six years, while a further zł.164 million is due to be cancelled. And the sector certainly isn't free of state aid. This year the coal companies have been granted zł.701 million, with zł.126 million earmarked for closing mines and zł.395 million designated for voluntary redundancy schemes.
Maksymilian Klank, the president of Kompania Węglowa (KW), which controls 21 mines and employs 73,000 miners, says they will be dependent on aid for some while. "So far restructuring is impossible without state help. Losses from previous years caused a standstill in investments. Now we have to make use of good times and invest in the future, so that the taxpayers don't have to support us anymore," Klank said.
Government officials are now devising strategies to recapitalize KW to enable restructuring ahead of privatization. Last week strategists revealed their plan to pump zł.900 million into KW by allocating shares from companies such as Jastrzębska Spółka Węglowa.
Even though Poland has made considerable advances, productivity is still relatively low on the global scale- between a fifth and a tenth of the productivity seen in South Africa, the U.S. and Australia (see graph). Part of this is inevitable because Polish mines are very deep (while the more productive operations are open cast or shallow), and part of this is a result of massive under-capitalization.
But the World Bank's Strongman says Poland is well placed in the market to offset this. "One of the great benefits of Poland is its position in Europe. The industry is nowhere near as productive as the Unites States or Australia. But what protects Poland's coal industry is the transport costs. Poland can still be competitive in the European market."
Strongman says Poland must capitalize on its current position-but he has a warning. "We now have an industry that has made considerable strides on the road to reform. Along with that it is also beginning to take environmental issues seriously. In total it has a pretty positive story to tell.
"The industry must not become complacent because there is a short-term commodity price boom. At the moment there is an opportunity to continue improving production and create an attractive window for privatization.
"The industry is far better placed now than last year and privatization could take place somewhere between the end of next year and 2006."
