Luke Sharrett/Bloomberg

Polish Black-Hole Mining Risks Labor Unrest Before Election

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Poland’s struggle to help Kompania Weglowa SA, the European Union’s biggest coal producer, return to profitability risks unleashing union-led protests before October’s general election.

A threatened eruption of street demonstrations next month may seal Prime Minister Ewa Kopacz’s fate, with the ruling party already trailing the opposition in opinion polls. The cabinet extinguished demonstrations in January by scaling back its plans to shut unprofitable mines and agreeing to revamp Kompania with the aid of state-controlled utilities.

The government has missed two self-imposed deadlines for the overhaul and has a third looming on Aug. 31 as it seeks to stem the coal industry’s 1.4 billion-zloty ($372 million) loss in the first half of 2015. Power producers are reluctant to invest in an industry they regard as a black hole, especially as this month’s heatwave triggered electricity supply curbs which, according to UBS AG analyst Michal Potyra, may raise calls for further investment in infrastructure by utilities.

“Unless investors for Kompania are in place by the end of the month we will resume strikes,” Dominik Kolorz, the head of the regional Solidarity union for the coal region in Silesia, said in a phone interview. “It may get even hotter” in September “than during the summer.”

The potential investors, mostly publicly traded state-controlled companies, have suffered on the stock market whenever they’re mentioned alongside Kompania. An index of energy stocks dropped 17 percent year to date, almost three times that of the WIG20 gauge of the biggest and most-liquid companies.

Bid Blowup

PGE SA, the biggest power group, lost 18 percent this year, while peers Energa SA also declined 18 percent and Tauron Polska Energia SA, which may buy Kompania’s Brzeszcze mine in a separate deal, fell 36 percent.

On Aug. 4, Tauron bid 1 zloty for the unprofitable mine, adding a laundry list of conditions and sparking a dispute with the Treasury minister, a supervisory board shuffle and a letter of protest by union representatives upset about the offer.

Treasury Minister Andrzej Czerwinski reiterated on Aug. 12 that merging utilities with mines is the “right thing.” He has said in the past that he won’t strong-arm power companies to buy stakes in Kompania, the country’s third-biggest employer.

“I assume the ministry will force utilities to invest in mines, just as it happened every time when Kompania was in trouble,” said Bartlomiej Kubicki, an analyst at Societe Generale SA in Warsaw. “Avoiding strikes is a priority.”

January Deal

One potential investor may be the Investment Fund for Polish Companies, or FIPP, which currently has 1.5 billion zloty ($399 million) under management. The Treasury may want to get state companies to contribute to the fund, boosting its capital four-fold and allow for bigger investment in Kompania, according to media reports.

In January, Kopacz traveled to Katowice, the capital of Silesia, to help work out an agreement with unions to draw up a shortlist of three to four investors to inject about 800 million zloty into Kompania by May. Since that still hasn’t happened, the prime minister may need to make the trip again.

“The government signed the agreement and it should stick to its promises,” said Kolorz. “It looks like they have been leading us on all that time.”

The Treasury plans to meet all the terms negotiated in January, spokesman Emil Gorecki told Bloomberg News last week.

The opposition Law & Justice, expected to win October elections, hasn’t revealed its own detailed mining strategy, though it may want to transfer some utility profits to mines, said Piotr Naimski, in charge of the party’s energy policy.

Party’s End?

The government has “no control” over the country’s coal industry with utilities “refusing obedience” to participate in its overhaul plans, Beata Szydlo, Law & Justice’s candidate for prime minister, said on Monday at the Brzeszcze mine.

Receiving aid from state companies would not be unprecedented for Kompania. In 2014, coking coal producer JSW SA paid 1.5 billion zloty for one of Kompania’s mines, which turned out to be a money-losing deal.

SocGen’s Kubicki said it’s still an open question who will invest in Kompania and how much cash it will need as long as coal prices remain low. The price for next year’s delivery fell 18 percent this year to the lowest since at least 2007.

“Two months before the election, the ruling party has no strategy that would allow it to save itself,” political analyst Wojciech Jablonski said. “Civic Platform is losing its main region, upper Silesia, and it can’t do anything to regain the support of miners or anyone else.”

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