Pit blaze could signal end for Britain's coal mines

Britain's burning coal pit may herald the last act for UK underground coal mining, which is already battling greener government policy and cheap imports from Colombia, Russia and the United States.

The fire, which erupted at the Daw Mill Colliery on Friday, is still raging and owners UK Coal, which produces around 40 percent of Britain's coal, has said the mine was unlikely to reopen, endangering the future of the entire company.

Domestic producers supply 30 percent of the fuel for Britain's coal-fired power stations and mined around 17 million tonnes last year, which was split evenly between deep and opencast mines.

The share of imports has risen sharply since privatisation in 1994, a decade after the bitter strike which ended the glory days of the industry that powered the Industrial Revolution.

EU laws will come into force in 2016 that will require coal-fired power stations to slash emissions of soot and other harmful pollutants, meaning many older plants will close rather than paying the hundreds of millions required to clean up.

Government forecasts suggest the amount of coal burnt in Britain's power stations will fall sharply after 2016, to around 28 million tonnes from 58 million tonnes in 2012.

That figure is expected to dwindle further to just 13 million tonnes by the end of the decade as more coal-fired power stations close while costs are expected to rise.

"Doubts about demand for coal in the decades ahead are causing finance to dry up for the domestic coal industry in the short-term because investors are less sure as to whether they will get their money back (over the long-term)," said David Brewer of CoalPro, the main lobby for Britain's coal industry.

Although almost every tonne of coal produced in Britain is burnt in the country's power stations, and domestic miners have negotiated long-term contracts with utilities, in future domestic producers will have to compete with high volumes of imports for a smaller slice of the pie.

"Although buyers will still value the security of supply and lower transport costs offered by UK coal, imports can offer greater flexibility in terms of quality (such as levels of sulphur, ash content and energy value)," one trader with a British utility said.

If Daw Mill fails to reopen, it would be the second body blow to Britain's mining industry in the space of three months.

In December, Hargreaves Services, owners of the 100-year old Maltby pit, said the mine would close in March with the loss of 540 jobs.

The future of Hatfield Colliery, also in Yorkshire, is increasingly doubtful after plans for a coal-capturing power station near the mine were scrapped, industry sources said.

Around 12-gigawatts of current coal-fired capacity is slated to come offline by 2016, according to data from ENTSO-E, a European network of grid operators, and lower cost imports may test the loyalty of utilities if the cost of UK coal continues to rise.

EU laws controlling emissions of soot and other harmful pollutants, government subsidies for wind, nuclear power and gas and tighter carbon emissions targets mean that coal is likely to be the big loser in the UK energy mix.

From April, power generators will have to pay a carbon floor price of 16 pounds for every tonne of carbon dioxide emitted, driving up costs of using coal.

"Producers might need extra finance to get through the short-term problems, such as more working capital. And if this is not available operators might have to draw their horns in and reduce the scale of their business," Brewer said.

Relatively high labour costs compared to foreign producers of coal have made deep shaft mining increasingly unprofitable, underground deposits are dwindling and, while easier to access, surface mines are hobbled by expensive fuel, driving up costs for equipment such as excavators and gas-guzzling mining trucks.

Mining unions warn that many of the 6,000 remaining jobs in the industry are at risk unless more government support is offered.

"The coal mining industry continues to be butchered by an energy industry driven by imports of coal," said Chris Kitchen, general secretary with the National Union of Mineworkers, which has seen its membership decline from over 100,000 in the 1980s.

Prompt physical coal delivered into northwestern Europe trades at around $85 a tonne, while API2 coal swaps, the benchmark price for British production, are worth around $100.

No new power coal-fired power stations can be built in Britain unless they capture and bury greenhouse gases, and few utilities are willing to pay for the technology without bigger subsidies.

SOME HOPE?

However the grim outlook does not appear to have deterred some investors. Around 50 applications are in the planning process to develop open-cast mines, according to the Loose Anti-Opencast Network, a pressure group that opposes new surface operations.

Energy minister John Hayes vowed last month to put the "coal back into coalition."

There are concerns among his Conservative colleagues that their centrist Liberal Democrats government partners have penalised the domestic coal mining industry in favour of more expensive renewables.

UK Coal, whose listed shareholder is Coalfield Resources met with the government this week to discuss the future of the company's operations, and in a letter published on Wednesday Britain's energy ministry said it was "committed to exploring all the options" to support the company.

But even if pressure on the government to do more to prop the ailing coal mining industry succeeds, any financial help could be limited by EU rules that curb state aid and deep cuts in public spending.