COAL SECTOR POISED TO POUNCE IF GERMANY OPENS ITS MARKET

COAL SECTOR POISED TO POUNCE IF GERMANY OPENS ITS MARKET

One big question is bugging the international coal business: What will happen in Germany?

The answer will be expressed in tons - millions of tons - of steam coal.

COAL MINES HAPPY

Coal mines in the United States, Colombia and South Africa like the prospect of a new market. The German government is taking the first step toward ending the billion-dollar hand outs that have allowed the Ruhr mines to stay in business by digging out coal that is at least four times more expensive than the spot market prices at the nearby ports of Rotterdam and Antwerp.

Germany's constitutional court ruled last December that the subsidies paid by electricity consumers to bridge the gap between German and imported coal was illegal and must stop by the end of 1995. The German government also was committed to ending a parallel subsidy that obliges an electricity utility to buy local coal.

In theory, the ending of subsidies should open the flood gates to imports.

"The German market remains the last of the great unpicked plums for the international coal market," according to International Coal Report, an industry newsletter.

But in practice, no one is sure how the market will work. The German government itself hasn't said what its plans are for next year.

'GROWN OLD WAITING'

''People have grown old waiting for the German market to open up," said Gerard McCloskey, of McCloskey Coal Information Services.

"It's anybody's guess what will happen in Germany," said fellow analyst David Morris.

No one expects the Bonn government to turn off the tap at a single turn.

"Without subsidies, there would simply be no German coal," said Mr. McCloskey, who is attending the CoalTrans 95 conference here with more than 1,000 other coal industry officials.

While Germany's automakers and machine tool manufacturers are renowned for their ruthless efficiency, its coal industry is famed for defying economic logic, courtesy of the taxpayer. A ton of German coal costs 280 deutsche marks to 290 deutsche marks ($198 to $205), compared with an average import price of 90 deutsche marks ($63).

The subsidies have been huge: 6.4 billion deutsche marks in 1992-94 for coking coal and 8 billion deutsche marks a year since 1992 for steam coal.

The subsidies sealed off a lucrative market, but there were few complaints. The European Commission in Brussels accepted the German argument that since there was no cross-border coal trade in the European Union, the state handouts didn't distort competition. U.S. producers made only halfhearted appeals to Washington to protest the subsidies.

SUBSIDIES CONFORM TO RULES

Indeed, the subsidies conform to "stringent" EU rules, Gunther Brandes, a director at the Federal Ministry of Economics in Bonn told the delegates here.

Coal accounts for 30 percent of Germany's energy requirements, made up of 125 million tons a year of lignite and hard coal and imports of around 15 million tons.

Starting next year, power plants will not be obliged to buy set volumes of German coal, Mr. Brandes said.

"There will only be individual contracts between mining companies and power stations," he said.

The government has been wary.

"German coal," Mr. Brandes said, "will remain a top political issue."

Moreover, the subsidies will continue, with a ceiling of 7.5 billion deutsche marks in 1996 and 7 billion deutsche marks in 1997 and 1998. These would enable German mines to sell 37.5 million tons in 1996 if they can cap production costs at 200-deutsche-mark per ton, falling to 35 million tons in the following two years.

This is below the 41 million tons of domestic coal the power plants were contracted to buy under the old system, thus opening the door for imports to make up the 3.5-million-ton shortfall next year.

IMPORTERS NEED OUTLETS

Importers will need outlets as other markets decline. Demand for coal in Britain, for example, will probably halve in the next five years as nuclear power and natural gas continue cutting into coal's traditional power generation and industrial markets, according to a recent report by Cambridge Econometrics, an independent consultancy.

The question about German imports has become more critical as the rally, which pushed spot prices to $44 per ton in Northwest Europe from $32.18 months ago, has run its course largely the result of the unexpected availability of high-sulfur coal from the United States.

And while German imports are a big talking point, traders said Europe was not the major factor in the market. The Asian nations will rely increasingly on coal to fuel their economic growth, said John Coleman of the Paris-based International Energy Agency.