Ailing coal giant Kompania Węglowa seeks wage cut to lure investors

Headquarters of Kompania Węglowa, Katowice, Poland (Kris D, CC)

Kompania Węglowa, which was on the brink of bankruptcy, is in talks with trade unions over wage cuts

The wage cuts that are reportedly seen as a precondition of selling the company to investors and a long-awaited capital injection of PLN 1.5 billion (EUR 0.35 billion).  Newspaper Dziennik Gazeta Prawna reports that Kompania Węglowa (KW) has enough funds to survive until April.

Company CEO Krzysztof Sędzikowski, who was removed from his post on February 23, said in 2015 the interested parties included two private companies, financial and strategic investors. The options reportedly include state-owned utilities and energy companies bail out KW.

KW, which was on the brink of bankruptcy in 2015, is expected to launch the Polish Mining Group (PGG) this May and transfer 11 of its mines to the new company. The publicly owned KW, which supplies coal to 60% of Poland’s power stations, is also the largest coal mining company in Europe. Its gradual decline has accelerated in the last couple of years with falling coal prices and rising costs.

The government had hoped to bail out the loss-making company, but the European Commission said it would investigate any state support — and likely find it in breach of a law banning state aid for mines due to close before of 2019.

Sędzikowski said in late 2015 that the company needs to raise PLN 2.2 billion (EUR 0.5 billion) to survive, with PLN 1.5 billion coming from investors, none of which are non-Polish, according to reports, although the ex-CEO did not disclose identities. Sędzikowski said the restructuring was already having a “positive effect,” suggesting that in just a year the average cost of producing a ton of coal had fallen from PLN 300 (EUR 68) to PLN 260 (EUR 59). The business plan for the PGG projects that this will fall further to PLN 214 (EUR 49) by 2017.

According to KW data, only three of the eleven mines in question were profitable in 2015, with another two mines close to making a profit and the rest loss-making. “Ultimately all the mines must be profitable; we have already succeeded in doing a lot to improve profitability, but there is still much to do,” the CEO said.

KW in 2015 received PLN 350 million in advanced payments for four of its best performing mines sold to a newly set up unit of coal exporter Węglokoks. The sale of KWK Rydultowy-Anna, KWK Marcel, KWK Jankowice and KWK Chwalowice mines is a part of the state plan for KW. Subsequent KW mines will be transferred to the Węglokoks-run SPV later.

The Polish government is struggling to save the ailing coal industry, which has been hit by high costs and a falling world prices for coal. Prime Minister Beata Szydło wants, for example, a special  government agency to buy up stockpiled coal to give mining companies a cash injection.

Brussels’ goals is for the EU to cut emissions by at least 40% by 2030, for renewables to account for 27% of energy and for energy efficiency to increase by 27%. The Polish coal industry losses amounted to €390 million in the first three-quarters of 2015 and the industry has  debts of €3.5 billion. It costs about €90 to mine a ton of Polish coal, way over spot prices of about €60 a ton.

According to Eurostat data, around 83% of energy consumed in Poland is produced from black and brown coal, while in the rest of the EU 28, the average is 28%. Only around 10% comes from renewables (the EU 28 average is twice as high, at 20,4%) and only 4% comes from natural gas and oil (while in the rest of the EU 28 it is 25%). The problem with gas and oil is that 90% of it is imported from Russia. According to the long-term energy security strategy adopted two years ago by Donald Tusk’s government, coal will remain Poland’s main energy source until at least 2030 and will slowly be replaced by renewables, nuclear power and shale gas. Currently, some 70% of Poland’s 5.5 million households warm up their houses using coal installations, simply by using ovens.

“Even the worst coal mines in the US are three times more productive than the average productivity of Polish coal mines,” according to a report into Polish mining by the Warsaw Institute of Economics (WISE) published in June 2015. The report suggests that employment in the sector will need to more than halve over the next five years or the majority of Polish mines will cease to exist. “A review of revenues from coal sales and costs of excavation from the last 10 years indicate that the current problem of the Polish coal sector is the growing average cost of excavation,” the report “Quo vadis? Prospects for the development of the coal mining sector in Poland” notes.

The most negative impact was seen in the case of KW, the report argued, noting that even during the period of high coal prices, KW’s EBIT [a measure of a company’s financial health] did not exceed 5%, with coal mine Bogdanka’s figure by comparison 20%.

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