2016 is a crucial year for the Polish mining industry. The end of the commodity boom on the global market and the EU regulations that prevent subsidising unprofitable mines revealed the massive scale of structural problems the industry faces, forcing decision-makers to make the effort and restructure it. Since late 2014, a few of the less productive mines were transferred to the Mine Restructuring Company and employment in the industry dropped significantly, which triggered a noticeable increase in productivity. Read WiseEuropa report!
However, the actions taken so far are far from satisfactory. Regaining financial stability by the sector requires making major investments and cutting costs. As the mining sector has no available resources, energy companies are to become involved in the restructuring process. The Polish energy sector needs to face the challenge of financing the capital-intensive modernisation of the ageing electricity and heat generation and distribution infrastructure as also needs to comply with the climate, energy and environmental requirements of the European Union.
In the event of a failure of the restructuring program, Polska Grupa Górnicza (Polish Mining Group, abbr. PGG) will face the prospect of bankruptcy in 2020 at the latest, and the possible passing on the cost of maintenance of unprofitable mines to citizens will mean the expenditure of 220-360 PLN for the household per year – write the experts from WiseEuropa in the latest report ‘Collapse – will fusion with the energy sector save Polish mining?’.
According to the report, the favorable outcome of the consolidation of the mining and energy sectors may only be assured by the restructuring of mining companies that will not only reduce employment and wages, but also provide the possibility of phasing out the least profitable mines. ‘This means reducing coal extraction in three of the largest Polish mining companies by more than 40%, and employment – by half, already within the next two years. After that date, the EU regulations will make it impossible to close unprofitable mines, which may lead to their uncontrolled bankruptcy and sudden redundancies of all employed miners’, report the WiseEuropa experts.
Prospects of PGG
Polska Grupa Górnicza, in the shape agreed upon between the Government and investors with trade unions in April 2016, has little chance of becoming profitable – concludes the report. Even with the increase in coal prices and achieving the expected efficiency improvement, it will require further recapitalization at the beginning of the next decade. A long-term stagnation of prices or the failure of the restructuring process will result in PGG facing the prospect of bankruptcy even earlier – no later than in 2020, and possibly even as early as in 2018 – stress the WiseEuropa experts. Only the deep restructuring gives PGG investors real opportunity to profit if the coal price recovers, as well as to limit their losses in the event of price stagnation.
Is the direct taking over of mines by the energy sector a good alternative
The report also examined the alternative option, involving the acquisition of individual mines that are a part of Kompania Węglowa (the largest coal mining company in Poland) in 2016 – i.e. Katowice Coal Holding JSC and Jastrzębska Spółka Węglowa – by Polish Energy Group, Energa, Tauron and Enea. According to the report, involvement in unprofitable mining of bituminous coal could severely limit the development prospects of state-controlled energy companies. What is more, the failure of the restructuring of mines acquired may even threaten the survival of some energy companies.
In the next two decades, the state-owned energy companies have to invest hundreds of billions of zlotys in the modernization of the infrastructure. Without it, they not only will lose their competitiveness and market position, but also may endanger the stability of the energy system and the entire economy. At the same time, their investment options are limited, as they cover from 40 to 70 percent of the investment needs of the Polish energy sector, emphasize the WiseEuropa experts.
The report estimated that in the event of a failure of the restructuring, the possible passing on the cost of maintenance of unprofitable mines to citizens will mean the expenditure of 220-360 PLN for the household per year. In addition, according to the estimates, it is probable that within roughly 20 years the mining of bituminous coal will lose the economic raison d ‘ être in Poland.
The report ‘Collapse – will fusion with the energy sector save Polish mining?’, authored by Maciej Bukowski, Urszula Siedlecka and Aleksander Śniegocki, was created in WiseEuropa under the research programme Energia, Klimat i Środowisko (Energy, Climate and Environment). Under the programme, we operate in the following areas: Polish and the EU energy and climate policy, domestic raw materials policy, improvement of the resource economy’s efficiency, protection of environment and public health by reducing harmful emissions, sustainable transport policy.
In this report we attempt to present the results of merging the coal mining and the energy sectors in Poland. To this end, we evaluate the perspectives ahead of the just established Polska Grupa Górnicza, which is to take over the assets of Kompania Węglowa, and we consider the results of the broader consolidation scenario, assuming vertical integration of also the mines that are currently owned by Jastrzębska Spółka Węglowa and Katowicki Holding Węglowy. We also consider various restructuring scenarios, analysing how they may affect the investment capacity of energy companies and their valuations, and indirectly the wallets of consumers and taxpayers.
The analysis starts with a brief overview of the methodology. In the next three chapters we describe the outcomes of the individual scenarios of consolidating the coal mining and energy sectors and we also analyse the sensitivity of the obtained results to changing market conditions. The last chapter contains a summary of the analysis and recommendations.