LONDON (Reuters) - Surging UK coal use should have made 2012 a profitable year for domestic miners but slumping coal prices and high diesel costs have viciously squeezed them.
More production and job cuts will be on the cards unless mining firms can attract investors just to maintain current output because banks are increasingly unwilling to lend.
Britain's largest miner UK Coal, dogged by debt and losses, is battling the clock to restructure and split its coal and property arms by December 31.
The company has said it may have to appoint administrators by next year if that does not happen, communications director Andrew Mackintosh said on Tuesday.
"We have been hit this year by production problems at our biggest mine, Daw Mill, a low coal price and an increase in costs such as fuel," he said.
ATH Resources is also restructuring and Hargreaves looks set to shut its Maltby underground mine. ATH declined to comment on their restructuring.
Britain's coal use has risen this year - but only because it has been cheaper for power stations to use than costly gas, and the winners have been the foreign exporters who dominate the market.
"Coal consumption is up only because generating from gas is double the cost of using coal in Europe," said ATH chief executive officer Alistair Black.
UK imports of all forms of coal were 11.9 million tonnes in Q2, a 64 percent rise from year-ago levels, due to an 81 percent rise in steam coal imports, mainly from Russia and Colombia, according to the Department of Energy and Climate Change.
Domestic mining will supply less than one-third of the country's needs this year, roughly 18 million tonnes out of a total estimated consumption of over 60 million, although the highest since the boom years of the 1990s, UK industry sources said.
Mining costs worldwide have soared in the past five years as the commodity boom inflated the prices of diesel, labour, explosives and trucks.
Diesel makes up about 25 percent of a surface mine's costs and has added around 4-5 million pounds of unbudgeted costs this year to UK miners' balance sheets, industry sources said.
The majority of Britain's mining is now surface mines which rely on diesel for extraction machinery and truck transport. Most deep mines closed after the 1984 miners strike when the industry shrank from 100 million tonnes a year output and a workforce of several hundred thousand to less than 40 short-life opencast mines and under 6,000 workers in 2011.
While crude oil prices have eased somewhat, the cost of diesel, particularly in Europe, has spiraled higher on a supply crunch due to refinery problems in the region and further afield.
"Diesel prices used to correlate well with coal and provided a natural hedge but then came ... rising oil prices and diesel," Black said.
LOW PRICES, UNCERTAIN FUTURE
International coal prices slumped from $120 a tonne in Q4 2011 to around $80-$85 in October because an unexpected glut of U.S. coal exports, pushed out by the shale gas boom, flooded the market and UK miners were not immune from the price slide.
"Producers in the UK who sold at prices linked to the API2 index (a price benchmark) will not have made money," Black said.
Suppliers have been encouraged by utilities to link their sales prices to a published, floating index because utilities want to hedge their fuel purchases and power sales using swaps.
"The problems the UK miners are facing are not of their making, these API2 levels are no good for them," said a source at one of Europe's largest utilities.
Ever-tightening credit and a global rise in costs mean that the UK's industry is unlikely ever to see a significant revival and the country will stay reliant on imports.
"There are large coal reserves in the UK which could be mined profitably and definitely would attract the right investors if they believed in the people running the companies - and miners need to know there's investment in the mines, to believe they have a future," said Richard Budge, who bought most of the UK's pits when the industry was privatised in 1994, forming RJB Mining.
"One positive thing is that you can sell all that you produce," said Alistair Black.
There are about 35 working surface sites but these small mines need replacing every four years, said Dave Brewer director general of CoalPro, the association of UK coal producers.
"We've got plenty of surface coal to be mined in the UK, all the closures after the 1984 strike were mostly old, deep underground mines," Brewer said.
The key will be to get funding for replacement mines.
"One of the biggest issues in the UK has trying to secure new financing facilities because when you look at forward coal prices, your business plan looks much weaker than a year ago because prices have fallen," Black said.
British mining firms need coal prices to be $100-$115 a tonne to make a profit but forward prices for 2013 are $95, 2014 is $106 and 2015 is $111 - with such vulnerable future margins, miners are struggling to raise finance from risk-averse banks.
(Editing by William Hardy)
Source: http://news.yahoo.com/uk-miners-hit-cheap-coal-dear-diesel-despite-160547330--finance.html
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