Examination of Witnesses (Question 620-639)
MR GERRY
SPINDLER AND
MR CHRIS
MAWE
20 JUNE 2006
Q620 Chairman: I am getting the impression
from you that you are pessimistic about that situation. We will
ask you some questions later about how the situation might change
but is UK Coal sitting there, to use an appropriate metaphor,
burning with desire to expand the market, to sink those new shafts
and to reopen closed mines, which does become possible at certain
price levels, or is it just trying to eke out its existence for
the next 10 to 20 years while the available supplies are exploited?
Mr Mawe: Within the energy review
we are essentially looking for some form of direction that we
could go in with the market. In particular, what we are seeing
is a growing reliance on imported coal and a forecast that is
currently within the DTI which has usually been very pessimistic
in terms of the quantities of coal burnt, but that forecast shows
that we are going to need about 50 million tonnes of coal per
year, every year for the next ten years, which is a substantial
quantity. We are currently importing about 30 million tonnes of
that and domestically producing about 20 million tonnes. Clearly,
the direction that comes out from the energy review as to the
requirements for coal will help us, effectively as a private business,
cut the cloth to make the necessary investments. As Gerry has
already pointed out, we can significantly extend the amount of
coal production from the existing shafts that we have by investing
but clearly we would need some forward visibility on how much
money we would invest in order to get coal. There has to be a
fair market for that coal going out, but if we see further future
reserves required there are coal reserves around the country that
can be accessed. The type of investment that is needed to sink
a new shaft is however several hundred million pounds. It is a
very, very long investment period and a very, very long pay-back.
Some of the clean coal technology plants that are comingyou
cannot capture the carbon as yet but they are carbon capture readywould
in fact justify that sort of investment under certain circumstances.
Q621 Mr Wright: In terms of the price
increase, it is probably largely due to the fact that both China
and India's rapid economic development has taken up a lot of those
resources. You mentioned that there was no intention at this present
time, because of the prices, to sink a new shaft but at what sort
of level do you think there should be an increase? You mentioned
the figure of £700 million in development costs. The same
thing really applied to the oil and gas industry when the majority
of the gas and oil was taken away and there was a certain amount
left. The price went up and, all of a sudden, they can open up
the caps again and extract that oil and gas. Is not the same thing
applicable to the coal industry? When the market determines that
the price will rise because of the shortage within the UK, there
will come a time when it will be economical for the industry to
once again get the coal from either deep mine shafts or from open
cast mines. What sort of level do you consider that would be at?
Mr Mawe: It varies reserve to
reserve. One could argue that the current levels that coal is
at justify some significant investment but what you do not have
is the forward visibility, because to repay that level of investment
you need contracts that run out far beyond the timescales that
the generators will currently write. These are 10 to 15 year contracts.
We have heard uncertainties as far as the carbon credit and carbon
trading scheme and also the Large Combustion Plant Directive can
hinder that level of investment. The issue is less frankly the
current delivered price level, which is very high for the generators,
and more the longevity with which that price level will remain
where it is. We strongly believe that the price level will stay
high. In fact, we believe it will climb, particularly as China
and India demand much more coal. They are burning around 200 million
tonnes of coal per year in addition to what they are burning,
which is essentially ten times the UK's total production every
year. That will keep prices very high but of course that is just
simply a forecast going forward. What is very difficult for this
industry to see is a forward price projection as to where that
price will stay. Indeed, in the energy review, what we are looking
for is some indication, some confidence or some assurance as to
what the DTI believes the future price is going to be for coal
under those demand scenarios. The key issue that we face is unfortunately
slightly more close to home in as much as we have to make investments
now in the existing mines to access coal in the next five to ten
years. We need that level of assurance in order to be able to
make those investments notwithstanding sinking new mine shafts.
Q622 Mr Wright: Surely the industry
can see where it is going under your own admission with China
and India. I think you said it is 200 million tonnes a year that
they use. Quite clearly it is going to grow. I think you said
there are 20 to 30 years left in what we have at the present time?
Mr Mawe: We have around 300 million
tonnes of accessible reserves which can go quite a long time but
not with all of the current mines.
Q623 Mr Wright: Surely the industry
itself can see it has a long term future and indeed the price
is bound to increase as ours comes down? Surely the industry can
see that as a long term prospect? They do not need the government
to say within 10, 15 or 20 years there is going to be an element
of need and this is going to be the pricing structure.
Mr Spindler: Part of the issue
that we face is the fact that the investment needs to be made
now. It cannot be deferred. It needs to be made under the current
economic circumstances we have, the current prices which we can
sell the coal for. That does not represent the market price. We
believe that the price for a tonne of coal is going to increase
enough to justify continued development and production from UK
Coal's mines. The issue is making the investment in a timely enough
fashion to make sure that capacity is there when needed.
Q624 Mr Wright: We have been told
that the Harworth colliery is closing. Do you know the reasons
why it is closing?
Mr Spindler: The Harworth colliery
is closing because it cannot afford to develop additional panels
under the contract it is currently serving.
Q625 Mr Wright: What is the planned
closure timescale of that?
Mr Spindler: The mine is exhausting
its last panel right now. That panel should finish about June
or July. We are attempting to get a contract that will justify
additional development.
Q626 Mr Wright: It is all down to
contracts?
Mr Spindler: Yes.
Q627 Mr Wright: Have you approached
the government in respect of this?
Mr Spindler: We have informed
the government of the dilemma.
Q628 Judy Mallaber: We have talked
primarily about sinking shafts for deep mining. What are your
current expectations and projections on open cast mining?
Mr Spindler: We think, first of
all, that an open cast mine is a considerably different animal.
It is usually much smaller, produces for a much shorter period
of time and can be put in more quickly so it can respond to spikes
in demand. It is much easier to ensure that you make money in
a service mine because you would not put it in if you did not.
For our purposes, we project that the portion of service mining
we have will grow from where it currently is at about 600,000
tonnes up to as much as three to four million tonnes if the market
can sustain it and if we can get planning permission.
Q629 Judy Mallaber: What is your
expectation on the likelihood of making that kind of expansion?
In which parts of the country would you think it is most likely
for you to be able to pursue it?
Mr Spindler: There certainly are
reserves enough. Most reserves that exist simply because of the
geology of the circumstance exist in the north east, in Durham.
Q630 Judy Mallaber: You have not
told me what your projections and expectations are. Are you expecting
to be able to achieve that?
Mr Spindler: Yes.
Q631 Mr Weir: You seem to paint a
picture of generators as being very short-sighted, using their
purchasing power to beat down domestic coal prices to such an
extent that suppliers like yourself are likely to go out of business
through an inability to invest in future production. Are they
really that myopic? Do they take no account of security of supply
for the future?
Mr Spindler: That is perhaps true.
If I understand what compels a generator, it is the matching of
contracts for supply with contracts for delivery. Contracts for
delivery are generally limited to a two month duration. A contract
for supply of longer than that involves an unhedged risk.
Mr Mawe: The generators' buying
practices are very entrenched from many years back where the suppliers
price the coal that they are buying against the international
market. The situation four or five years ago was indeed very different
to the situation today. There was over-supply and the DTI statistics
for coal burn showed a decreasing amount of coal burn going forward.
In that respect, the customers have purchased coal from us expecting
that to persist. It has now changed around. The situation is very
different. Coal burn is in fact increasing. What we are trying
to do is to achieve a mindset change where the value of deep mined
coal is fully reflected in the contracts. Although you can say
that the generators are slightly myopic, at the moment what we
are trying to do is change that mindset to get indigenously deep
mined coal fully valued. For that I will give you some examples.
I refer to the submission. Typically, the buying policies of certain
of the major generators are published and we have put them in
the document. They try to purchase indigenously deep mined coal
at below the international market. That prices our coal at the
same level as coal that is located in Amsterdam. The difference
is that our coal is actually located one mile away from the power
station and it costs £5 per tonne at least less in freight
differential to bring it to the power station. That is through
an optimal port, the nearest port. We do not get paid for that.
What we do not also get paid for is if you were replacing our
coal. You would have to bring it in through another sub-optimal
port which in general terms can be Hunterston. As you are aware
with the rail infrastructure that we have, shipping huge quantities
of coal down the country's rail network can be problematic. That
adds another £5 per tonne at least. We do not get paid for
that. We write long term contracts in sterling. You have to buy
coal in dollars. We are also near to the customer. Quality complaints
and issues can be regulated because you have a close working relationship.
We are trying to change views, successfully in some cases. If
that value is reflected, we will certainly have a very viable,
vibrant deep mining industry going forward that is more than capable
of producing 10 to 12 million tonnes of coal. To put it into a
little bit of perspective, it may seem like a lot but that seven
to eight per cent of the power consumed in this country will come
from an indigenous source which, at a time when we are importing
ever more gas from Russia and ever more coal from Russia, will
make an important contribution. We are moving in that direction.
Mr Spindler: Because of the rationalisation
that UK Coal has made and the stabilisation of its cost structure
and because the market has cooperated, the future for UK's coal
looks better than it ever has. There is a fair amount of optimism
for this but we have to access the prices and be paid for the
advantages that Chris has alluded to.
Q632 Mr Weir: You talked earlier
about needing a direction from the government in the energy review.
It seems to me that what you are saying is you need a better deal
from the electricity generators who are independent companies.
I am not sure how a direction from the government is going to
change that. What are you looking for the government to say about
coal in the energy review that would give you confidence that
your company and industry has a strong future?
Mr Mawe: It would be sensible
to have a statement of need for indigenous deep mined coal. It
would be important for us all to recognise that we need a fair
market structure. You do have to remember the way the industry
has developed and moved. Our mines effectively have one customer
to whom they can sell. That customer can determine the price,
can benchmark the price, but we cannot realistically sell the
coal to other power stations because we have limited customers
who have flue gas desulphurisation fitted. That is going to change
as more of the fleet get additional flue gas desulphurisation
but unfortunately that is too late because the investments need
to be made now. What we are looking for is a fair market for our
coal and a fair level playing field when we are entering into
longer term contracts for the coal reserves that we have. We firmly
believe that we can supply coal at below the long term average
cost of imported coal. That is, the delivered cost.
Q633 Mr Weir: You are not looking
for the government to set a base price for coal for power generation?
Mr Mawe: No, we are not. All we
are looking for is a little bit of market supervision. We are
not looking for intervention. It is very important to point out
that UK Coal are not looking for subsidy or any form of heavy
handed intervention. We are just looking for supervision of the
market to make sure that the indigenous deep mine coal industry
does not wither because it cannot access the same prices that
are currently being paid for imported coals from Russia.
Q634 Mr Weir: You touched earlier
on the difficulties in transportation from ports and such like.
The Coal Authority response to the energy reviews argues that
the constrained transport infrastructure within the UK is a limitation
on how much imported coal can be effectively moved from the ports.
Do you have any evidence that transport inadequacies are causing
difficulties in relation to imported coal at present? In the longer
term, would not any future coal fired stations be built as close
as possible to import facilities, as the current ones were built
close to mines?
Mr Mawe: First of all, the new
capacity point. Scottish and Southern have announced that they
are investing in a 500 megawatt clean coal plant at Ferrybridge.
UK Coal are working together with Scottish and Southern on that
particular project. A clean coal plant without carbon capture
reduces carbon emissions by round about 30 per cent so it is much
more efficient, but the point is that that particular generation
plant is on the existing Ferrybridge site which is next to Kellingly
Colliery. New plants could be built nearer to ports but it does
seem as though the trend is to build them on existing sites. Planning
and regulatory issues and skills as well as grid access make it
more economic to do that and that perhaps would be the trend.
It may not happen that they are built nearer to ports. The evidence
we have is purely anecdotal rather than factual on the rail infrastructure.
As you know from our submission, 50 per cent of electricity was
generated from coal this winter. Coal peaks and you burn about
16 million tonnes in a heavy quarter compared to eight million
tonnes in the summer. Because of the huge quantities of movements
over the winter, there were some difficulties with the rail network,
particularly shifting large quantities of coal from Hunterston
down into the Ayr Valley where we are located. It is something
that we have anecdotal evidence on but nothing more than that.
Q635 Mr Weir: I was interested in
what you were saying about the new plant Scottish and Southern
are investing in, on an existing colliery. Have you noticed any
change in generators' attitudes to domestic coal as opposed to
imported coal, given the perceived problems there have been with
their increasing importation of gas and gas coming over the interconnector?
Mr Mawe: We are seeing a change
in attitude. It has not yet moved far enough.
Q636 Mr Weir: It is going in the
right direction?
Mr Mawe: It is going in the right
direction. You have to value UK deep mined coal differently to
the way it has been valued in the past. In the past it has been
benchmarked to international prices and frankly we have been priced
as the first tonne that anybody buys, which is always the cheapest
tonne. The last tonne is the most expensive one. What is important
is that, in looking at deep mined coal going forward, we are priced
as the last incremental tonne. Why? Because that last incremental
tonne has to come into Scotland. It has to be shipped by train
down the Settle/Carlisle railway. It has several changes of drivers.
It moves at 30 miles an hour. It is very difficult to move around.
It is therefore more costly. That is the tonne that we are replacing.
We are working hard to convince the customers that that is the
way we need to be dealt with for new contracts and new arrangements
going forward to supply coal for these new, clean coal power stations
and indeed for the existing power plants that are out there.
Mr Spindler: Additional evidence
which is not anecdotal is that the Settle/Carlisle line was shut
this past winter. When it was closed, there was a significant
increase in the requirements from the Kellingly mine, for example,
and the call on the coal there which we delivered went up by about
40 per cent.
Q637 Mr Bone: Can I make sure I have
this right? UK Coal is a private company?
Mr Spindler: Yes. It is publicly
traded.
Q638 Mr Bone: You have more than
50 per cent of the UK market?
Mr Spindler: Yes, for domestic
coal.
Q639 Mr Bone: You are a pretty dominant
player in the UK. I am trying to get my head round this very good
private company, sort of implying that it wants government intervention
in a contract which is a commercial one. There are not many examples
of where the government intervenes in commercial contracts. Why
should it happen in your case?
Mr Spindler: The contracts reflect
certain elements that no longer exist, that are not applicable
and are damaging to not only ourselves but also we think the energy
supply picture for the UK. What we are looking for is some supervision
to be able to ensure that we can access the prices that the open
market would give us because frankly we cannot access that open
market. There is nowhere else the UK's coal can go but UK plants.
We do not have an alternative. The generators do. They can always
bring in imported coal and are willing to do so for a variety
of reasons we have already mentioned, even at a higher price.
They are playing the spark spread between gas and their profitability
rather than the absolute cost of the coal they deliver.
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