Poland relies heavily on coal for electricity production but its coal mining industry is unprofitable and inefficient. State-owned coal mines operate at a loss and receive billions in subsidies annually but powerful mining unions have resisted restructuring. A recent government plan to restructure the largest coal producer was abandoned after union protests, continuing Poland's pattern of prioritizing miners' benefits over addressing economic challenges in the struggling industry.

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Poland has an expensive set of priorities that it needs to
address to continue its economic development. Innovation
is one of them – Poland only spends a fraction of 1% of gross
domestic product on R&D while the top European countries
spend closer to 3%. Then there’s demographics: as Poland’s
population shrinks, the government needs to figure out how
it is going to pay a growing number of senior citizens their
pensions while increasing payments at the same time. These
problems will cost billions of złoty to solve – but not all of
the funding that the government has at its disposal is going
to address them. Why? One reason is that an awful lot of it is
being dumped down Silesian coal pits.
Yes, innovation is on the lips of all
of the government’s ministers. But
in the first days of her term in office,
did Poland’s newly appointed Prime
Minister Ewa Kopacz meet with sci-
entists, start-up founders or innova-
tors? No. Instead, she did what nearly
all of her predecessors have had to do
at one point or another: she rushed
to appease the miners, who had threat-
ened to bring Warsaw to a standstill
with their protests. She bowed to them
then, but just a few months later coal
miners once again stole the spotlight.
Clouds have been looming over
Poland’s coal mining sector for years,
but recently the big state-owned mining
companies have become so unprofita-
ble and indebted that they have begun
considering the unthinkable: trimming
employee benefits. This triggered
a wave of discontent across Silesia,
because in line with tradition – albeit
against all economic sense – Silesian
miners expect to keep producing coal
nobody needs, at prices no-one can
afford, and on employment terms set
by the employees themselves.
Between a rock and a hard place
Poland’s state-owned coal mines have
been struggling for months to return to
profit as they cope with low coal prices,
weak demand and high operating costs.
Cheap oil and the impact of the US
shale boom on energy prices reduced
the cost of coal over the past 18 months
to levels that made many of Poland’s mines unviable. Plagued
by powerful trade unions, which have effectively sabotaged
any real restructuring over the past two decades, they sur-
vive thanks to politicians, against market forces. In the first
half of 2014 Polish coal mining companies posted a loss
of €173m after tax. Looking at the sector’s core business
– coal sales – their predicament becomes even more grim.
Here, the loss exceeded €240m.
Europe’s largest coal miner, the ailing state-owned giant
Kompania Węglowa, was responsible for the bulk of the sec-
tor’s woes. It lost €260m in the first 11 months of 2014, and
has liabilities of almost €1bn. As of late, Kompania Węglowa
has been losing approximately €14 for every tonne of coal it
mines. The company had to give up a bond issue in November
2014 after investors demanded sky-high yields.
The key problem for Polish coal mines are high production
costs. It cost €75 to produce a tonne of coal in Poland in the
first half of 2014, against the global average of approximately
€54 per tonne. At the same time, the price of coal in Poland
dropped 8% y/y in that period, to around €67. Following
decades of intensive exploitation, Silesian mines have had
to dig deeper and deeper for coal,
which, together with excessive benefits,
is pushing costs beyond affordable lev-
els. Polish coal mines extracted slightly
more than 34m tonnes of coal in the
first six months of 2014 (down by 2.8m
tonnes y/y) with sales reaching 31.8m
tonnes (down by 4.3m). As of the end of
November, Polish mines had stockpiles
of unsold coal totalling 8.2m tonnes.
Although Poland’s coal reserves are the
second largest in Europe, it is cheaper
for Polish power plants (at least the
ones not bound by long-term contracts
with mines) to import coal from abroad.
Digging their heels in
Polish mineworkers are tough folk.
With more than 100,000 employees
and powerful trade unions, Poland’s
coal mining industry has effectively
resisted any real change. Fearing strikes
and civil unrest, no government in the
past quarter of a century has dared take
on the miners, who continue to enjoy
wage levels and perks that are unheard
of in any other industry. Despite
the sector’s miserable financial condi-
tion, trade unions are demanding pay
increases that had been promised when
prospects seemed better. Proposals
that miners give up some perks, includ-
ing double-than-average pensions,
two annual bonuses, discounts for city
transport, free coal allowances and
school subsidies for children, are being
met with strong resistance on the part
of the unions, who believe their mem-
bers deserve what their fathers and grandfathers got. A little
less than a decade ago, the Solidarity union blocked govern-
ment plans to raise the retirement age for miners after dem-
onstrations turned into street fights.
The memory of those scuffles remains vivid among Polish
politicians, which explains why the government had been tip-
toeing around the issue for months, never failing to empha-
size that job cuts at Kompania Węglowa were not an option.
However, the latest restructuring plan for the sector, unveiled
in January, included a handful of more daring proposals.
BUSINESS
‘Silesian miners
expect to keep
producing coal
nobody needs,
at prices no-one
can afford, and
on employment
terms set by
the employees
themselves’
Inefficient operations
Annually, Kompania Węglowa produces just
620 tonnes of coal per employee (35m tonnes
in total). Globally, the worst-performing com-
panies mine about 1,000 tonnes per full-time
employee. Britain’s coal mines, slimmed down
after the drastic Thatcherite restructuring,
produce more than four times as much coal
per employee as Polish ones.
Lech Kaczanowski
is the editor of Poland
Today's weekly
newsletter, Business
Review+. From 2002
to 2013 he covered
business and eco-
nomic news from
Poland for Sweden's
Bonnier Group and
other Nordic media.
A former Open Soci-
ety Institute Fellow
at Duke University
in North Carolina,
Lech has degrees
in economics,
sociology, and
journalism.
Diggingahole
Poland’s miners are fighting to keep their state-funded benefits in a sinking industry
This led some to hope Ewa Kopacz could become Poland’s
‘Iron Lady’. According to the plan, Kompania Węglowa was
to be taken apart, its four worst-performing pits shut down
and the remaining nine mines to be transferred to a special
purpose company owned by Polish coal trader Węglokoks.
The ministers had expected the entire rescue package, includ-
ing generous severance payments for up to 4,800 redundant
workers, to cost some €530m. It took little more than a week
of largely peaceful protests on the part of miners for the gov-
ernment to backtrack on its plan yet again. Under a union-
approved settlement, the chronically unprofitable mines are
to be “restructured” and then sold, with Poland’s state-con-
trolled energy groups being mentioned as potential buyers.
Rock bottom?
Poland, which relies on coal for 90% of its electricity, has
been trying for years to reduce its dependence on this highly
polluting form of fuel. However, the government has recently
been pushing for stronger ties between Polish energy pro-
ducers (which are profitable and fully restructured) and
coal mines (see box). Time and again the authorities have
found creative ways to avoid any drastic measures in Silesia,
and with parliamentary and presidential elections all due
in the coming months, the current government will be
no different. The successful dismantling of the original
restructuring plan for Kompania Węglowa by the unions
encouraged workers at other coal mining firms to reject any
calls for more rational spending.
Early February saw employees of Poland’s top coking coal
producer JSW orchestrate strikes and street fights, demand-
ing the dismissal of their CEO, who had dared to propose
a range of cutting measures in order to keep the company
from going under. As long as the decisions with regard to the
mines are purely political in nature, it is impossible to properly
assess the true potential of the sector.
According to a recent report by economic think tank
CASE, state subsidies for the mining industry amounted
to €5.25bn over the 2010-2013 period alone. Between 1990
and 2012 Poland’s coalmining sector received more than
€40bn worth of aid, an amount of money that could finance all
of Poland’s universities and state-run run R&D institutions
– for more than a decade.
The ostrich strategy applied by Poland’s decision mak-
ers simply prolongs the sector’s agony and increases
the end cost to taxpayers, but as long as citizens are content
to watch passively as their tax money continues to disappear
down the depths of Silesian mine shafts, politicians will keep
their heads in the sand. Thousands of miners have the unions
to raise hell on their behalf.
Meanwhile, millions of employees in other sectors have
yet to find someone to represent them. Scientists, who need
funding for research, find it abroad after hearing repeatedly
that the state coffers are empty. Entrepreneurs, whose bud-
ding businesses creak under the weight of Poland’s many
fiscal burdens, quickly lose motivation to innovate. As a coun-
try that still has plenty of catching up to do, Poland may
one day realize the price it paid for social harmony was too high.
Let others have their Apples and Samsungs. Poland will have
its coal. by Lech Kaczanowski
Spreading the burden
One way of maintaining the status quo in the mining sector is by
making other, better performing state-controlled industries pick up the
tab. Last year, Tauron, the country’s second-biggest utility, agreed to pay
€75m to buy a stake in one of Kompania Węglowa’s businesses, while
JSW, the biggest coking coal producer in the EU, paid €357m for another.
A few months later JSW itself ended up in dire straits and its manage-
ment’s cost-cutting plan was violently rejected by the unions in early
February. PGE, Poland’s largest utility, revived a €2.8bn coal-fired
power plant project and will buy coal from Kompania.
2013 average
salaries:
– Poland: 3,823.32
– Mining sector*:
8,615.37
*Traditionally, miners
are paid 14 monthly
salaries per year.
Source: Central
Statistical Office
(GUS)
BUSINESS
photos:FilipBłażejowski(Forum)