Keeping the Selby Complex Open
11 February 2003
The Selby Complex was extremely profitable between privatization and 1998. Financially the situation has now deteriorated as production volumes declined. If we take the annual profit and loss from 1995 to 2001, it has made a loss of only £2 million. UK Coal has announced its closure in December 2003 or March 2004. It may seem difficult to imagine that it could be saved at such a late stage, especially given IMC's pessimistic mining engineering assessment in mid-2002. However, IMC deployed little economic analysis, and the National Union of Mineworkers asked NERA to conduct a more thorough economic examination of how far the present plight of Selby might be restored or mitigated by new approaches, or new ownership (in the latter case to look at future possibilities if UK Coal carries through its plan to stop mining in the near future).
While NERA's study of Selby has been brief and needs substantial and detailed follow-up to test its conclusions further, the authors' preliminary findings include:
Productivity and Cost Reduction
There have been radical improvements in productivity and cost-reduction over at least 15 years in the UK deep-mined coal industry. It is now by some distance the lowest-cost coal producer in Europe. However, the UK industry is still struggling to match the price of imported coal, which has also fallen steadily.
Profitability
The price which Selby may expect to receive for its output, most of which will inevitably be for relatively local power station use, is largely fixed until 2006 and cannot realistically be expected to rise (in inflation-adjusted terms) thereafter. While coal prices might rise to higher levels temporarily, the existence of large reserves of coal in many parts of the world, easily mined by open-cast methods, means that the long term price of coal on world markets is very unlikely to rise in inflation-adjusted terms. Improved profitability for Selby can therefore only come through higher output levels, or reduced costs, or preferably both.
Selby's Reserves
It is inherently difficult to be sure what the reserve base is at Selby, especially as little recent investment appears to have been made in "proving" uncertain coal resources and turning them into firm reserves. The authors have not done any independent work on this, but note that reserve estimates have fallen significantly at Selby. This seems to be partly because of limited recent investment to "prove" that coal classified as a resource or potential can be upgraded to a reserve. Following IMC, it seems as if there are good prospects of reserves at Riccall and Stillingfleet lasting until 2005 at least. Wistow is more uncertain, largely for geological reasons. The reserve figures at all three pits have been sharply reduced in IMCs recent report. However, there is clearly much more coal at Selby and much of it could be reclassified as reserves.
Closing of Operations at Wistow
The assumption on the part of IMC that the whole complex must close simultaneously if one mine should need to close needs further testing, especially as it should be possible to reduce overheads at the Gascoigne Wood reception and washing terminal. This possibility arises because a substantial part of costs at Gascoigne Wood are in the form of a fixed price contract that compels UK Coal to pay prices for washing that, per ton, are high relative to what should be possible (as the experience at Tower Colliery shows).
Improving Profitability
The main prospects for improving profitability appear to be a reduction in Gascoigne Wood overheads from their current high levels towards a more "economic" (lower, real resource-based) level; and rectification of substantial face gaps at Wistow and Stillingfleet which currently contribute substantially to losses. In the case of Wistow these improvements should be within the control of UK Coal, while at Stillingfleet there have been serious geological complications. In addition there are a number of quite small but collectively significant actions affecting both income and costs that could have a significant effect on cost reduction.
Cost Savings
NERA's estimates of cost savings that might be possible as a result of these changes are inevitably approximate and need further testing. Under continued UK Coal management they might amount to around £15 million annually (UK Coal appear to hope for £20m, though IMC are sceptical). However, under a new company, able to start again at Gascoigne Wood, savings might reach £25m. However such savings could be made only under favorable circumstances, and while they could reduce the need for operating subsidies, they would be unlikely to eliminate this need.
Alternate Governance
The authors examined alternative forms of corporate structure should a new company take over the complex, including worker buy-outs and companies limited by guarantee. None of these possible new forms of governance offer much prospect of reducing costs further, though under a worker buy-out (as at Tower) shareholders could take part of their "dividend" as an extended working lifetime rather than as cash. The authors examined the experience at Tower, and while Tower has been a great success, its lessons cannot easily be transplanted to Selby. However, the fact that a new company would start afresh, especially at Gascoigne Wood, offers a real prospect of larger cost savings than if UK Coal continued as owner.
Operating Cost Subsidy
Selby would require some kind of subsidy, at least initially, while cost savings are put into place. The Government has proposed a new investment aid scheme, for which Selby could quality under the category of "capital market failure." The Government could also re-implement an operating aid scheme, which would be of greater benefit to Selby.
