Poland feels the pain of its love affair with coal

For generations, the region of Silesia has been at the heart of Poland's love affair with coal as a source of pride and heroism.

 

Election to Poland's top job has depended on maintaining coal's special national status and Prime Minister Beata Szydlo, a coal miner's daughter from Silesia, swept to office in October on a promise she would ring-fence the industry's 100,000 jobs.

 

It is a pledge she is now under almost as much pressure to break as to keep.

 

The energy ministry has said the nation's biggest mining firm, headquartered in Silesia, risks running out of cash at the end of the month. It is a familiar cry, and in the past, funds somehow appeared.

 

This time, however, they may not.

 

Coal miners became heroes in Silesia when nine of them were shot dead in 1981 in an anti-communist protest against martial law. Now they are being asked to accept cuts in salaries that are among the highest in Poland because of the dangers of the job.

 

Energy ministry officials supervising Kompania Weglowa (KW), the European Union's biggest coal mining company, say it cannot pay salaries in May if trade unions' reject a plan to cut the company's costs, more than half of which go on staff.

 

The plan is a condition for other state-run companies to inject 1.5 billion zlotys ($394.36 million) at the start of May, a deal which could be questioned by the European Commission if it looks like illegal state aid.

 

To pass muster, there needs to be a convincing business plan showing the miner will start to make profits.

 

The government also wants KW's creditors - including the Polish unit of Spain's Banco Santander BZ WBK and France's BGZ BNP Paribas to convert their debt into KW shares.

 

"The talks are held on the highest level," a government source said, adding that the banks' final decision is expected early in the coming week. This was confirmed by another person.

 

BZ WBK and BGZ BNP Paribas declined to comment.

 

Together, BZ WBK and BNP Paribas hold 150 million zlotys of KW's debt. Any exposure coal is considered financial risk and the European Union is considering "carbon stress-testing" its financial firms.

 

The trade unions at KW accept cost-cutting in principle, but refuse to agree to wage cuts or layoffs.

 

"Cuts in wages would be an act of self-destruction," Boguslaw Hutek, the head of KW's biggest trade union, said.

 

"Now young people are thinking in a different way from the older generation. If they don't get decent earnings, they will go elsewhere."

 

Mining's financial woes mean Silesian students are already switching to classes in solar and wind energy and away from the mining studies that traditionally guaranteed a job for life.

 

Poland's pits have clocked up losses of billions of zlotys as world coal prices sunk to record lows.

 

It is not the only country affected: Peabody, the world's largest privately owned coal producer, declared bankruptcy this month after a debt-fuelled expansion into Australia.

 

Part of Poland's problem is the depth of the seams - up to 1,200 metres compared to 465 metres on average in China, the world's biggest coal producer and consumer. Deeper pits are more costly because more energy and time is required to extract coal and cool the shafts to make working conditions bearable.

 

Despite lower costs compared with Poland, the Chinese government has said it is shifting to cleaner fuel.

 

Michal Wilczynski, a former chief geologist in Poland and former deputy environment minister, said trying to rescue Kompania Weglowa was futile.

 

"It's too late to rescue it. Poland's coal mines will not be effective, no matter how deep the cost cuts are, because of geology," Wilczynski said.

 

"Rejecting the global trends would take us back to the Communist era with an isolated economy."

 

Last year Poland's three biggest mining firms, including Kompania Weglowa, KHW and the listed JSW as well as three state-run power producers, which burn the mines' coal booked a net loss of almost 10 billion zlotys ($2.6 billion).

 

That might be manageable, but for all the collateral damage.

 

The market capitalisation of Poland's biggest power group, the state-run PGE fell by over a third, or more than 11 billion zlotys in 2015, mostly because politicians involved it in helping to bail out Kompania Weglowa (KW).

 

Even Polish firms that have sought to move away from coal were sucked in.

 

Among Poland's utilities, Energa has the biggest portfolio of renewables; its shares fell by more than 10 percent, or more than 500 million zlotys, when it announced it would invest in KW on March 16.

 

Two sources, one official and one from the industry, said the ministry has also been trying to convince Poland's refiner PKN Orlen to get involved in KW.

 

The low price of coal on international markets compounds the problem. Poland lost almost 30 zlotys on every tonne of coal its mines produced last year, according to industry figures.

 

Before he was sacked in February, KW's CEO Krzysztof Sedzikowski was battling in Brussels for EU approval to use public money to keep open loss-making mines.

 

There is little sign Brussels will approve that, EU officials say. The Competition Commissioner has said she can only allow funding of uncompetitive mines on condition they are being phased out, which is at odds with Szydlo's electoral promise that she would not close any mines.

 

Industry analysts say the smart approach would be to plan an orderly retreat from coal - currently nearly 90 percent of the energy mix - to more diverse supplies, including solar and wind, which they say is often the cheapest new source.

 

But the government is working on regulations that would make new onshore wind next to impossible, something critics say makes no sense.

 

"This is as if someone said - we are done with the mobile phones technology, we will only have fixed lines from now," Zbigniew Prokopowicz, the CEO of Polenerga, a privately owned Polish utility said.

 

The previous government began a long-term energy strategy to 2050. The Energy Ministry did not answer Reuters questions on whether the current government was formulating its own.

 

Earlier this year the prime minister said Poland needed to diversify for the sake of energy security, but coal would remain the basic fuel.


($1 = 3.8036 zlotys)

(By Agnieszka Barteczko and Barbara Lewis; Additional reporting Anna Koper, Marcin Goclowski and Wojciech Zurawski; editing by Philippa Fletcher)