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The mines need to be privatized, but this industry has no future

After a clear signal from Brussels that the government’s recovery program of the bankrupt Kompania Węglowa (the largest coal mining company in Poland) will be regarded as unlawful state aid, the mines belonging to this state-owned company found themselves in a very difficult position. Although PM Ewa Kopacz argues that Nowa Kompania Węglowa will be created nonetheless, and calls for ‘more optimism”, the risk of an uncontrolled bankruptcy of the company is greater than ever.

‘To paraphrase an American saying, we have such a good crisis in the mining industry, it would be a shame to let it go to waste’, says for money.pl Maciej Bukowski, an expert of the Forum for Energy Studies, the President of the Warsaw Institute for Economic Studies. ‘If we reform and privatize this industry, and where we are at it – eliminate pension privileges in this profession, the mining will come out of the crisis a lot stronger, and Poland will benefit from it’, he argues. He points out, however, that the Polish mining, which has been pumped with 80 billion PLN over the last 25 years, is a declining sector of our economy.

Jacek Bereźnicki, money.pl: Does the steady fall in the coal prices below 50 dollars per ton mean a chronic unprofitability of Polish coal mines?

Dr. Maciej Bukowski, Warsaw Institute for Economic Studies: In order to achieve profitability, employment in Kompania Węglowa and other state-owned companies should be reduced two or even three times. It entails a necessary reduction of extraction, as the unit cost of coal mining in Poland is higher than the world prices. That is the case today, and the forecasts – very probable in my opinion – prognose a further decline in coal prices.

What is the reason for such a sharp decline in prices of this material?

China is undergoing a deep economic slowdown. It can be expected that they will experience difficulties in the next few years, since they significantly over-invested, and soft landing will be challenging for them. This, however, will imply lessened demand for energy, among others – many factories close, the production is suspended, and the pressure to improve efficiency and reduce costs is too high.

And the energy industry was not prepared for it.

Production capacity in the mining industry worldwide has greatly developed during the times of the raw material boom of this century’s first decade. There are numerous mines in Australia, Colombia and the United States that produce coal and metals for the world market very cheaply. The increase in the production capacity in mining occurred in anticipation of continued rapid growth in demand for coal and other raw materials in China. Now the boom ends and we are left with a great number of producers and notably lesser number of potential buyers. The prices are falling.

Let’s go back to the Polish mining industry. There is a paradox here, because on the one hand, we have enormous losses of Kompania Węglowa and Jastrzębska Spółka Węglowa (JSW), the mines are being closed, and on the other – private investors, both domestic and foreign, announce building completely new mines.

Whether they do invest and open new mines, remains to be seen.

But surely they have some calculations that show that it is a profitable business.

Yes, because they plan to do it using completely different technology, with significantly reduced employment, and in consequence much greater efficiency per employee. At the moment, a Polish miner produces roughly 700 tons of coal per year, while a miner from the underground mine – which is the most popular type of mine in Poland – that is being closed right now in the UK produces 2100 tonnes of coal per year, i.e. three times more. And in the worst underground mines in the US this productivity amounts to 2500 tonnes, while in the average ones – 4000 tonnes, not to mention surface mining. So what are we talking about? The productivity of a Polish miner is incredibly low, especially in the state-owned companies.

Is it due to the excessive employment or rather outdated technology?

Both. In these mines many people could quit working overnight without the decrease in output, and nothing would have happened. The second issue is very poor organization of work, although it is partly a consequence of the composition of coal deposits. Sometimes a miner wastes a few hours only to reach a wall and then return to the surface. It means that he works effectively for half of his working time. Operating such mines is pointless, their effectiveness is inevitably low.

Are such mines irreformable, is there nothing to be done?

Yes, it makes no sense to maintain these mines, to go over thousand meters underground, it just does not pay off. There is no other way, the mines with no future need to be closed, as this trend is irreversible. We cannot extract 700 tonnes per employee, when in the West the extraction of even 2 thousand tonnes is uneconomical. Granted, the wages are lower here, so for now it could be enough to extract 1200 or 1500 tonnes, but certainly not 700.

Said investors stress that their mines will be free from collective bargaining.

They have to be. The culture of trade unions that developed in Poland is very uncooperative. It is not similar to the German culture, where trade unions establish reasonable path wages in dialogue with employers. In Poland unions are especially complex in the public sector, in the state-owned companies – i.e. in the energy industry, mining, Polish State Railways or in schools. And they fight with all their might against privatization. There are fewer trade unions in private companies and they behave in a different manner. A private investor cannot afford to allow the unions behaving like in the state-owned mines, as it leads to a bad outcome.

A bad outcome?

When there was a raw material boom, the unions demanded wage increases, even though since it has ended, they do not want to participate in the losses. During a boom, a wage spiral in the state-owned companies has led to wages well above the market rate, which could have been seen while comparing wages in Kompania Węglowa, which is going bankrupt, and much more efficient private company Bogdanka. Bogdanka example clearly shows that miners are willing to work for distinctly lower rates, and moreover – due to a better organisation of work and more extensive use of machinery – they can be much more productive than what is the standard in the state-owned mining companies, such as Kompania Węglowa.

So the problems of Kompania Węglowa are largely the unions’ fault?

Union representatives demand an increase in wages and employment when the situation is good, and when the crisis comes, they are neither prepared to agree to job cuts, nor to reduction in wages or bonuses. They just lost touch with reality. It is not possible to function that way. If mining industry is to have the raison d’être, the investments need to be made and this sector is rather capital intensive. Therefore there has to be money for investments and revenues from the time of boom cannot be spent mostly on wages – it is not a coincidence that the profitability of Kompania Węglowa during that time was several times lower than that of Bogdanka. Being kept in check by both trade unions and politicians, the powerless boards of the public companies upset the balance between revenues and costs, consuming the majority of profits from the times of prosperity. And when the crisis came, it turned out that there are no dampers that would make the landing soft.

Do private companies fare better?

It’s really not a coincidence that the productivity in Bogdanka is higher by several dozen percent, wages are lower by 25 pct, and employment is reduced accordingly. Productivity in Bogdanka is roughly 1400 tons per employee, while an average in state-owned companies is little more than 700 tons. Please note what its owner did when coal prices started to fall – he began to reduce employment, look for savings and opportunities to increase productivity. A private owner knows that it is not just “today” that is important, but also “tomorrow”. He must take into account not only the need to have money on the ongoing activities, but also on necessary investments. Yesterday, 1400 tons may have been enough, but today rather 1800 tons need to be produced, and soon may it be that 2000 or 2500 tons will be necessary? It is highly probable, since the coal is cheap and wages in Poland are on the rise. The boards will so have to be prepared for wage pressure in a few years time. Knowing this, we have to already take investments and more extensive use of machinery into consideration, as this is the only way to raise wages in the long-term.

So the privatization is the only way?

The private mine is better managed. The additional bonus is freedom from politicians, who are rarely interested in economic rationality, and not only in relation to the mining industry. Thus state-owned mines need to privatized as soon as possible. When they are in private hands, the investors will know what to do – close this deposit, maintain the other one, employ so many people, retrain so many, let so many people go, change the organisation in that way, invest in this etc.

State-owned companies do not work in that way.

They do not behave like that, as their owner do not demand of them to think rationally about the future and look out for their long-term affairs. The state require its companies to protect social stability, i.e. employ as much workers as possible and pay high wages. It also likes to have some job positions to be filled. All this is attractive for politicians, but costly for the society.

Are attempts to rescue such state giants as Kompania Węglowa and Jastrzębska Spółka Węglowa doomed to failure then?

I do not believe in remedial programs without privatization.

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