If you believe a more appropriate subject for this week’s posting would
be the decision of the Swiss National Bank to effectively float the CHF, I
advise you revisit this post, especially in the light of some politicians’
proposals to help out over half a million mortgage borrowers (and also currency
speculators who have shorted the CHF) thumped by skyrocketing Swiss currency.
If not, I suggest we go back in time by 30 years, to bring back backdrop
of miners’ strike in the UK in 1984 – 1985 which led to closures of several
unprofitable mines. The atmosphere in the UK those days was in some aspects
similar to what is happening in the Polish mining industry. Some commentators
have attempted to equate Polish prime minister, Mrs Kopacz, to Mrs Thatcher, a
comparison for many out of place. Needless to say, just as British mining
industry was in deep need of turnaround, the Polish one also calls for it,
while the treatment it receives might be named overhaul at best.
The current situation has deep historical roots. Back in PRL the mining
industry, one of focal points of heavily industrialised socialist economy, was
pampered. Miners, the pride and joy of comrades were granted numerous
privileges then. Mines were developed regardless of economic legitimacy,
actually in the same manner as all companies in the socialist economy were
managed. In the wake of the shift into free-market economy rules of the game
have changed, but not for everyone. Most mines have remained a stronghold of
the PRL. In late 1990s one programme of winding down unprofitable mines was
launched. Later on no comprehensive strategy for the Polish mining has been
pursued. In the meantime, miners excelled at defending their fulsome privileges
(at the expense of Polish taxpayers), thus decreasing competitiveness of Polish
mines. Fluctuating coal prices for some time allowed the government to sweep
the problem under the carpet. Coal market slumped severely in 2009, but quickly
bottomed up and mines had enough capital and cash reserves to ride out the
short crisis. Coal prices rebounded in early 2010 and despite well-blown-out
costs Polish mines remained profitable until late 2012. Since mid-2012 coal
prices gradually declined and according to market forecasts, are unlikely to substantially
recover in the foreseeable future…
To examine the distress of Polish mining industry, let’s have a glance
at some facts:
1. Mining is a commodity business, thus above-average volatile and
exposed to price fluctuations. Each mine, with quite rigid costs (little
flexibility on technological and human resources sides) is a price-taker. It
means when good times roll in, a mine swims in cash, but faced with a downturn,
it can go under quickly. A prudent financial manager should run a company in such
way that effects of price movements are smoothed out.
2. Environmental policies, including those imposed by the EU, hit the
coal industry. Preferences for low-CO2 emission energy sources bring down
global demand for coal.
3. Despite EU regulations, Polish energy sector is doomed to use coal
and key fossil fuel, given scarcity and prices of other resources. Therefore,
power and heating plants will remain the key off-takers of Polish coal mines.
4. Mining is one of most heavily unionised industries in Poland. Trade
unions in some of the mines have sprawled into pathological size. Their power
must not be under-appreciated, since they are capable of bringing most of the
mines into standstill. Their bargaining power in negotiations is amazing, given
track record of consecutive governments of giving in and subsequently
maintaining status quo in the industry.
One could reasonably ask why some mines are profitable, some not and why
mining companies are profitable and others incur sizeable losses. All companies
in the industry are affected by falling coal prices, but for some market
environment means much lower profits, for others barely breaking even and for
the worst, threat of going bust. I have taken the trouble to unravel the puzzle
of why some companies fare much better than others, found several factors, but
no comprehensive answer. Just to name a few reasons for varying incomes between
companies:
1. poor corporate governance in state-owned companies; this includes
incompetent, too quickly turning over management, lack of clear-cut strategy,
strategic decisions made on the basis of political influences rather than
business analyses,
2. different technology-related cost of coal extraction (in some mines
drilling and extracting is much more costly than in others) and different
calorie-count of extracted coal which impinges on its price – for this reason
the same number of people may produce fewer tonnes of coal of worse energetic
quality,
3. low work efficiency and overmanning, both underground as well as in
overground administration,
4. one-side linkage between profitability of mines and remuneration of
miners. Personnel costs account for about 50% of mines’ operating expenses,
therefore the item has crucial impact on break-even point for mining companies.
While miners demanded to quickly privatise profits of companies when coal
prices were running high (bonuses, profit-sharing schemes), when market went
down, they reach out for the state aid and refuse to give up on their
privileges,
5. miners’ privileges which appear excessive in comparison to what other
workers enjoy. Most hard-working people in this country of course do not have
to work underground in heavy conditions, but also do not enjoy guaranteed 13th
and 14th pay and several allowances and fringe benefits.
The current slump on coal market has forced the government to take steps
to bail out the ailing industry. The restructuring programme is much belated
and therefore has to be implemented in haste. A long-sighted manager (a rarity
in the public sector) would gently launch such programmes when coal prices were
high and industry was capable of absorbing restructuring costs from cash
surpluses. For obvious reasons, such move would have been inconvenient for
everyone… It must be underlined, the originally proposed restructuring
programme treated the distressed industry really mildly.
After several attempts to defer insolvency of 100% state-owned Kompania
Weglowa, the biggest mining company in Poland, running 14 mines and employing
almost 50,000 people, the government was driven up against the wall. Either
they had throw a lifeboat to it, or let it go under, with all consequences. The
determination of the government to avert the bankruptcy of KW served as water
to the mill of protesting miners… The insolvency of Kompania Węglowa would
actually benefit nobody. In the scenario of mine liquidation the Polish energy
sector would lose the biggest supplier, more than 100,000 people would be
affected by redundancies. Economic consequences would include lower proceeds for
the government from personal income taxes and social security contributions and
higher social security spending. It could actually benefit predator investors
who would buy single mines after asset-stripping and turn them around (maybe
not the worst scenario)…
In some media reports I read some 70% of Poles support miners fighting
to save their jobs and blame the government for collapse of mining industry. In
contrast, when I look at comments under articles on the issue in the Internet,
I notice growing anger and discontent towards privileges miners enjoy,
blackmailing methods they resort to and meekness of the government. No wonder
ordinary people feel disgruntled. If their employer had to be downsized, they
could not count on generous severance packages. Most of them would get what
they must be paid (salary for their notice period plus severance pay in the
equivalent of one or two monthly salaries) and could not dream of two-year
salary. Most of them would not boast about above-average earnings and for most of
them, bankruptcy of their employer would be their, not government’s problem… In
the market economy if your employer goes bust or downsizes and you are laid
off, you have to go it alone! It seems miners are totally detached from the
market economy. For them it does not matter whether anyone wants to buy the
coal they extract, regardless of what invisible hand of free market shows,
their jobs must be saved… Who is going to pay for it is beyond their interest.
Here comes the question about the dissimilarity between Poland today and
Great Britain in mid 1980s. Mrs Thatcher had social support for her crackdown
on unprofitable mines. But does Mrs Kopacz have support of Poles for closure of
loss-making mines?
Yesterday the government and representatives of trade unions nailed down
an agreement on mining recovery. The government succumbed to trade unionists
and amended some of the provisions of restructuring plan:
1. there would be significant reshuffles in the ownership structure:
merges, purchases, buyout, all designed to inject the cash to mines from
wherever cash surpluses can be found,
2. instead of 4,000 job cuts, no one will be made redundant, however
some salary cuts will have to be accepted,
3. severance packages for those employees who will voluntarily come
forward to quit have been raised.
If somebody’s impression is that the government has just buggered it up,
well… some things sound better left unsaid.
During a long discussion on how to turn around the Polish mines one
modest proposal stood out. It was mentioned by former prime minister, Mr
Marcinkiewicz, who put forward to hand over the unprofitable mines to trade
unions and let them take charge of the business. Representatives of the trade
unions quickly agreed to accept such gift, provided on top of mines they
receive 3.2 billion PLN the government intends to spend on restructuring of the
taken over mines! Some things sound better left unsaid…
Time will tell whether government’s turnaround strategy for the Polish
mining proves successful. For the time being even the weather seems to be
against the industry. For more than a week temperatures have not dropped below
zero and a few times nudged to +10C.
2 comments:
Worth pointing out that the Labour governments that preceded Margaret Thatcher closed down more pits than she ever did. Also worth pointing out that Britain was held to ransom by the miners, the Three Day Week brought down the Tory government in the mid-'70s. I remember when Ealing with without electricity and we had to drive to Ruislip to eat fish and chips in my father's car. Polish miners have never antagonised Polish society to this extent.
Finally - by the end of this year, the UK will have just one working coal mine left. And yet 32% of British electricity is generated by coal-fired power stations. Energy security is not the same issue in the UK as it is in Poland - the idea that coal is a commodity to be bought on the world market caught on with Mrs Thatcher.
A great example how some events from the history are well-known, while others receive little attention. A quick look into Internet and I broaden my knowlege of the facts you mention.
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