Hogsback and the coal parable

AT THE risk of getting too literary for his readers Hogsback was fascinated to discover this week that coal is more than a fuel that powers half the world, it is also an allegory (or symbol) for this phase of the seemingly never-ending global financial crisis.

Staff Reporter

What that means is that events in the coal world have just provided a perfect picture of how the three major economic zones, Europe, the US and China, are managing the slowdown – while also providing a clue as to who is winning and who’s losing.

In Europe, coal miners are on the march. Well, they are in Spain, one of the countries suffering deeply from the cutbacks in government spending caused by the discovery that the region has been living far beyond its means.

There is no need to recite the ills of Europe. They are well understood. Where coal becomes part of the story is in the march of miners from the north of the country to the capital, Madrid.

They are not protesting poor working conditions, or low pay. They are calling for increased government subsidies.

In one event, the story of modern Europe is being told. Coal is no longer a viable business in Spain. It has become a business dependent on handouts, just like a frightening number of other European businesses that ceased to be viable in a world gone global.

In the case of Spanish coal, the industry received subsidies totalling 301 million euros last year. This year it will get subsidies totalling 111 million euros.

The miners claim the decline in government handouts to protect the industry from cheaper imported coal will force pit closures and cost jobs. The government is pointing to its treasury and saying “the cupboard is bare”

Spanish coal is the story of Europe, complete with riots on the streets of Madrid that are an ominous pointer to what might happen when other industries experience the same crisis. French car manufacturing, for example, or Italian clothing makers.

In the US, the coal experience is similar, but the response has been different – and a lot tougher.

Patriot Coal, one of the country’s biggest producers of thermal coal, has folded into the protective arms of Chapter 11 bankruptcy. Under this process a business can legally reorganise its affairs, slash costs and debt, and re-emerge as a leaner operation.

Details of how Patriot will be trimmed have not been revealed, but the fact that three big banks have put up $US802 million to fund the transition is an indication that they know what is going on.

New Patriot, a possible name after the bankruptcy process is finalised, will be paying lower wages, employing few people, and servicing less debt, because the US work-out process forces all players to take a haircut.

The difference with events in the Spanish coal industry is where the allegory kicks in.

In Europe, businesses are propped up for too long by government subsidies when they should be allowed to fail. In the US, tough times bring tough solutions.

China is the third coal example of how the world is functioning today because it is neither Spain nor the US. In the Middle Kingdom it is business as usual, thanks to its existing low cost structure, and hardline management with the power to adjust costs to fit the price of coal.

There is no better example of China powering away from Europe and the US than the Hong Kong Stock Exchange listing this week of Inner Mongolia Yitai Coal.

IMYC is a mainland business with its assets on the Chinese side of the Mongolian border.

Two factors make this Chinese coal business newsworthy.

Firstly, it is a rare example of a successful float of any company, anywhere, in a shell-shocked financial world, even if the final pricing of the float was at low end of expectation.

Secondly, the fact investors paid $US900 million for a slice of IMYC is a vote of confidence in the company, and its sole product, thermal coal for consumption in Chinese power stations.

Three coal cases. Three different results.

Spanish coal as an allegory for the region as it struggle to live within its means as the awful reality of national insolvency looms and people take to the streets.

The US, where hard-nosed business decisions are being forced on companies that cannot compete, but will be re-shaped, and emerge better for it.

China, where costs are being managed (sometimes brutally), but where business continues, and investors retain an appetite for coal.