Select Committee on Trade and Industry Minutes of Evidence


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 coming—you cannot capture the carbon as yet but they are carbon capture ready—would 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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