COMMISSION REPORT The market for solid fuels in the Community in 2000 and the outlook for 2001 - Preliminary Report

1. INTRODUCTION

Member States have presented to the Commission their estimates of production, supply and deliveries of coal and other solid fuels during 2000 and 2001. The data received from Member States is summarised in this report. The Commission has found it necessary to make estimates where the information from Member States has not yet been received or is incomplete.

This report focuses on the provisional results for 2000 compared with the actual figures for 1999, and makes the first estimates for 2001.

2. ECONOMIC BACKGROUND

2000 has seen the economic growth which emerged in the later part of 1999 continue. This strength in the world economy is expected to continue through 2000 although moderating in 2001. In some regions monetary policy may need to be tightened, although such adjustments are likely to be modest, with a similarly modest impact on economic activity. World GDP growth is forecast to achieve a level of 4.4% in 2000, slowing to 4.0% in 2001.

Uncertainty surrounds the effect of recent oil price rises and political instability in the Middle East. The major world economies are less reliant on oil as a proportion of their primary energy supplies but continued crude prices in excess of $ 30.00 per barrel could push the world into a period of significantly lower growth. Before the emergence of the problems between Israel and Palestine, it was thought that rising oil inventories on the back of lower GDP growth would cause a fall in oil prices over the next two years. Should these political problems persist then oil prices could remain buoyant.

The major engine of growth has been the USA, supported by a robust expansion in Europe and the countries in transition. US GDP growth was 5.2% on an annualised basis in Q2. Inflation continues to be low supported by high rates in productivity growth. However, there are several signs that the economy is slowing, and growth is forecast to slow to a more sustainable 3.3% in 2001. There are still concerns that the stock market could suffer a major correction which would also result in a sharper downturn.

The recovery in Japan is extremely fragile and based on increased export activity rather than domestic growth. Growth is likely to be modest when compared with the emerging economies in Asia. The Asian Developing markets are expected to continue with rapid growth over the next 2 years albeit from a base which was depressed by the financial problems experienced from 1997 to 1999. GDP growth levels in excess of 5% are forecast. Similarly Eastern Europe and the Former Soviet Union can be expected to continue to grow strongly as their economic reform bear fruit.

GDP growth in Europe is broadly based on strong domestic demand, added to which is the upturn in the global economy and a weak Euro which has aided export activity. Overall GDP growth in 2000 is estimated at 3.4% with this slowing to 3.1% in 2001. Although inflation has risen to above 2% in 2000 due to the increase in oil prices it should fall back in 2001.

3. HARD COAL

3.1 Production

3.1.1 Hard coal production in the Union in 2000 is estimated to be 85.4 million tonnes. This represents a fall of 14.3 million tonnes or 14.3% on the 1999 total of 99.7 million tonnes.

3.1.2 The UK fall in production in 1999 compared with 1998 was 3.86 million tonnes, or 71% of the EU total reduction. This is further estimated to fall by 4.3 million tonne in 2000. Use of coal in electricity generation has risen by 12% January to August 2000 compared with the same period in 1999 because of problems with nuclear plant. The increase in coal demand has been mainly met by increased imports of coal which are up 16% in the same comparison periods. A major contract for supply to Drax power station purchased by AES from the then National Power has provided some long term security for the deep mined sector. Recent rises in imported coal prices and gas prices should also provide relief for the UK coal industry. Preliminary forecasts for 2001 suggest that there will only be a modest fall of 1.8 million tonne reflecting the improved competitive position of UK coal. Most of this fall will occur in the open cast sector.

3.1.3 The impact of mine closures in Germany can be seen with production estimated to fall from 40,5 million tec in 1999 to 35.1 in 2000 a fall of 13%. Reductions in production are a consequence of the following mine closures;

Ewald/Hugo

Westfalen

Goettelborn/Reden

The full impact of this will be seen in 2001 when a further programme of mine closures and rationalisation should see production fall by 4.3 million tonne per annum in 2001/2002.

3.1.4 The fall in output of coal in France is in line with the closure programme which will see all coal production phased out by 2005. The reduction in Spain results from the closure of high cost capacity. Coal use in Spain has, however, increased in 2000 as a result high electricity demand. The extra coal requirements will be met by an increased level of coal imports.

3.1.5

>TABLE POSITION>

(figures rounded to nearest 0.1 million * European Commission estimate)

3.2 Imports

3.2.1 Imports in 2000 should increase slightly in 2000 with an out-turn of 154 million tonne compared with 152.5 million tonne in 1999, in spite of total coal deliveries in the European Union falling from 254 million tonne to an estimated 239 million tonne.

3.2.2 2000 has seen a growth in the importation of coal . This is the consequence of an improved economic climate and a significant improvement in Blast Furnace iron production in the European Union. Overall according to IISI ( International Iron and Steel Institute) returns Year on Year in September there has been an increase of 4.5% in the output of blast furnace iron.

3.2.3 Steam Coal Imports

>TABLE POSITION>

Source; Steam Coal Forecaster Issue 20

3.2.4 The major increase in imports is seen to come from Italy and Germany. In Italy continued high oil prices are seen as favouring coal fired generation over oil . In Germany the continuing planned decline in indigenous coal production will result in a increase in the level of importation.

3.2.5 Denmark

1999 has seen a decline in imports into Denmark as a consequence of cheap electricity imports. Some penetration of Danish electricity into European markets is anticipated which will result in a slight increase in coal importation in 2001.

3.2.6 Finland

Power demand in Finland is growing with a 1.8% growth January to July 2000 when compared with 1999. Coal has been a beneficiary of this with imports in 2000 predicted to increase by 0.5 million tonne. Some modest growth ( 0.25 mt ) is anticipated in 2001.

3.2.7 Sweden

In Sweden the reline of a blast furnace at the Lulea plant has led to a fall in the coal required for injection of 0.1 million tonne. It is expected that this tonnage will be reinstated in 2001.

3.2.8 Belgium

Coal has gained slightly from a 11% increase in electricity demand in Belgium and as a consequence coal usage is anticipated to be 0.5 million tonne higher in 2000 when compared with 1999. With new gas plants coming on stream in 2001 coal imports can be expected to fall by 0.5 million tonne.

3.2.9 France

France has maintained a high level of coal burn in 2000 as a consequence of improving economic activity and exports of electricity. It is extremely difficult to predict coal usage in France because of the influence of hydro generation , however, a reduction in the level of coal imports is expected in 2001.

3.2.10 Germany

Steam coal imports into Germany have fallen in the first six months of 2000 for a combination of reasons. Cheap electricity imports have impacted on generation. It is thought that coal buyers have been employing stocks rather than purchase imports which are rising in price in the hope that international prices fall in the second half of the year. Imports are likely to rise in 2001 in order to restore stock levels.

3.2.11 Ireland

Electricity sales are strong and coal fired generation has been working at high load factors. Imports are predicted to be 2.9 million tonne and stay at this level in 2001.

3.2.12 Netherlands

Although imports into the Netherlands by the power utilities have been subdued in the first half of the year, representing an annualised rate of 7 million tonne per annum compared with 8 million tonne in 1999. It is anticipated that there will be a stronger level of imports in the second half of the year which will result in an increase overall on an annual basis to around 8,98 million tonne. This trend will continue in 2001 to reach 10 million tonne.

3.2.13 United Kingdom

The recent rise in import prices will mean that the UK generators will maximise the use of UK coal under committed contracts. Imports will however still be required in order to comply with environmental restrictions on sulphur emissions. Imports have in fact matched last years levels and it is anticipated that import levels will have to increase in order to comply with sulphur restrictions in advance of fitting FGD on coal fired stations which have recently transferred ownership.

3.2.14 Italy

Italy has been hit hard by the recent rise in oil prices and generation at oil fired power stations has decreased to the benefit of coal fired stations. It is estimated that coal imports will increase by 0.5 mt in 2000 and a further 1.0 mt in 2001.

3.2.15 Spain

High demand for electricity has lead to high utilisation of coal fired plant. Taken in combination with reductions in Spanish coal production this has resulted in increased levels of coal importation. Coal imports are expected to increase by 2.5 million tonne in 2000 and a further 0.5 million tonne in 2001.

3.2.16 Portugal

Coal fired plants have benefited from low hydro availability and high oil prices which has maintained coal fired generation levels at high levels in 2000. Similar levels of generation are anticipated in 2001.

4. COKE AND STEEL

4.1 Coke production in the Union is forecast to fall by 1.8 million tonne in 2001 when compared with 2000 as a consequence of coke oven plant closures in Germany. Elsewhere coke production is likely to remain static. Coke production tends to be maintained at consistent levels in spite of the trade cycle, the steel-makers reducing the purchase of imported coke to compensate for reductions in iron demand.

4.2 The Union remains reliant on external coke supplies and this will continue through 2001. Although forecasts suggest that levels of coke importation will remain static any coke production problems would lead to increased demand for imported coke. The major sources will remain as China, Japan and Poland.

4.3 Coal employed for conversion to coke will fall in line with capacity closures in Germany. Coal imports, however, are likely to remain at 1999 levels in 2000 and 2001.

4.4 Steel production worldwide may fall slightly in 2001 after having reached record levels in 2000 but should remain above those of 1999. One of the major problems facing the steel industry in the Union is that after peaking in the early part of 2000, finished product prices have weakened in the third quarter.

4.5 In contrast, because of increased production in Asia demand for coal has increased. Mine closures in Canada and the withdrawal of US tonnage from the market mean that the supply demand balance is much tighter than in 1999. Significant (+10%) increases in FOB prices are possible, which combined with the strong freight market will put pressure on European steel producers. To a certain extent this is exacerbated by the value of the Euro for most producers in the Union, except for the UK because of the comparative strength of the pound sterling.

5. LIGNITE

5.1 Lignite production in 2000 is estimated at 239.1 million tonne. At this level of production it is close to the 1999 production of 238.5 million tonne. The major producer in the Union continues to be Germany , with Greece and Spain being the other significant producers. For the year 2001 Lignite production is forecast to increase to 243.5 million tonne.

5.2 Currently Lignite production costs in Germany are less than imported coal on a heat equivalent basis which should help lignite to maintain its position as a fuel for electricity generation. On this basis it is considerably cheaper than gas.

6. PEAT

6.1 Peat production in Ireland is forecast to decline slightly between 2000 and 2001 with estimations of 5.3 million tonne in 2000 and forecast of 5.1 million tonne in 2001, while in Finland production is exoected to reach 3.84 million tinne in 2000 and 4.16 million tonne in 2001.

7. THE CURRENT INTERNATIONAL MARKET FOR COAL

7.1 1999 marked the low point for international coal prices. Since October 1999 there has been a significant increase in the delivered price of coal into the European Union. Initially delivered prices increased as a consequence of strengthening sea freight rates. This (freight) increase was driven by increased demand for raw materials by the worlds steel industry.

7.2 By March 2000 increasing levels of industrial activity across the world was reflected in a tightening of the supply/demand balance for coal. FOB prices have therefore started to strengthen both in the steam coal and coking coal sectors. The supply side has been further restricted by labour problems at the Kaltim Prima mine in Indonesia and guerrilla problems on the railway serving the La Loma mine in Colombia Should this follow past trends FOB prices will remain strong through 2000 and 2001.

7.3 Factors which would support a continuation in strong coal prices are the lack of major new coal mining developments in the principal coal exporting nations and the rationalisation that has occurred in the coal mining industry since 1997. The overall number of coal companies involved in coal exports in South Africa and South America has shrunk as a result of amalgamations and buy outs. There is also cross linkage of ownership between South Africa, South America and Australia which could lead to a more disciplined approach to development and marketing. It will be interesting to observe whether the current strength of the coal market encourages new development and/or new entrants into the coal export market.

8. OVERVIEW PROSPECTS FOR 2001

8.1 As a result of the high price of oil and local problems such as failures in nuclear generation in the United Kingdom the total deliveries of coal in the Union are likely to exceed previous forecasts. From an economic standpoint coal is currently, in spite of increases , extremely competitively priced against the alternatives of oil and gas. The economic case for building new gas fired plant is very much weaker than in 1998/99 and as a consequence a slowdown in development of gas fired plant can be expected. This will give coal a breathing space until gas prices fall to lower levels. The environmental case still favours gas over coal.

8.2 The price rise in coal, combined with subsidy support for the UK coal industry should stabilise coal output over the next two years. Plans by generators to instal FGD on existing stations should also allow UK coal to maintain a significant proportion of supplies to the UK generators in the longer term.

8.3 Plans by the German coal industry to reduce output will result in a higher rate of decline than previously anticipated , imports of coal for generation can be expected to increase to compensate for the loss of indigenous supplies.

8.4 Blast furnace iron output is likely to decline slightly in 2001 from the relatively high levels of 2000. Although the closure of blast furnaces in Germany should compensate for the closure of Kaiserstul coke plant, any imbalance in supplies would have to be supported by increased coal and or coke imports. The Union will remain coke deficient and imports of coke will be required to support iron output.

8.5 Availability of coal in 2001 from the current supply countries will be much closer to demand levels than has been experienced in the last five years. Prices will be stronger than seen in early 2000. The US could return to its traditional role as a swing supplier if supply tightness results in price levels which are attractive. The only cautionary note would be that domestic demand in the US is high and suppliers may not wish to open up production for short term export business.