Scottish Energy News Reporter
Revenues at Hargreaves Services – the listed coal mining and trading company which owns and operates the remaining Scottish open-cast coal mining industry – have dived by nearly 25%.
In its latest annual report, Durham-based Hargreaves – which mostly operates in Fife and Ayrshire – saw income fall from £662.2 million in the year end May 2015 compared to £869.2 million the previous year. Underlying profit before tax from continuing operations slumped by £14.8 million from £55.1 million to £40.3 million.
But over the past 10 weeks, thermal coal markets have remained very weak and, although the rate of coal price decline has slowed, prices have softened further by approximately £1 per tonne.
In addition, and more significantly, demand for thermal coal in the UK remains exceptionally low as coal-fired power stations have been operating at low capacity levels in recent months – and have substantial accumulated stockpiles.
However, the company has stated that – although down – ‘King Coal’ is not yet out of the UK power generating picture.
Gordon Banham, Chief Executive, said: “At current coal prices, our Scottish coal production activities would be loss making as we will incur losses on the production of thermal coal that we can only partially mitigate by maximising production of higher margin speciality coals alongside the thermal coal. We will clearly seek to maximise the yield of such coals.
“But we see three principal reasons for continuing to invest in sustaining the Scottish surface mining operation.
“Firstly, we have a duty to our workforce and other stakeholders to invest and sustain the operation through difficult periods, within sensible commercial constraints.
“Secondly, to preserve these important assets so the Group can benefit from any improvement in coal prices. Finally, we see opportunity to build on synergy value between our production and coal trading and distribution operations, both in the thermal and speciality markets.”
With falling coal generating margins as a result of the backdrop of high carbon taxes, the threatened early station closures of Ferrybridge in West Yorkshire and at Longannet have already been announced.
Banham added: “Whilst the risk of the lights going out in the UK due to tight capacity margin is more a news headline than a reality in the short term, this risk has increased in recent times and should significant further coal station closures follow in the coming months and years it is less clear from where, and how quickly, new capacity can be brought onto the grid.
“However, the past 12 months have seen a perfect storm of low coal prices and a collapse in UK coal import volumes which has adversely affected the whole sector.
“Whilst we still believe the UK coal markets will offer opportunity for the group over the coming years, especially if coal prices improve, the events and developments over the past few months demonstrate that the political will to accelerate the removal of coal from the UK energy mix through energy policy and taxation is even stronger now than it was 12 months ago.
“As we review other strategic opportunities we will be looking in particular to extend our activities in the renewable energy, biomass and material handling sectors.”
Hargreaves presently has a live planning application in at Midlothian council – a former deep coal-mining area near Edinburgh.
Banham added: “We are working on revised master planning for the Monckton and Maltby sites and have also submitted a planning application for a 1,600 house scheme at the Blindwells site in East Lothian.
“If a positive planning decision can be gained, even taking account of compaction and site preparation investment the Blindwells scheme could present an exciting opportunity for the Group and for the Scottish Mines Restoration Trust which has a carried interest in the site.
Meanwhile, given Hargreaves’ focus on the coal sector, developments within the UK energy sector continue to have a significant impact on the trading performance and prospects for the group.
UK energy markets continue to be characterised by multiple policy changes and uncertainty. Although the UK’s Carbon Price Support tax was frozen at £18.08 per tonne of C02, this amount still equates to an additional £42 of tax cost for each tonne of coal burnt in a UK power station.
Banham concluded: “We have consistently stated that coal will have a longer run-out in the UK than many commentators expect.
“Coal can provide reliable baseload capacity and is therefore very complementary to intermittent renewable capacity.
“We still believe this to be the case but in the past few months we have revised our own expectations on the length of that run out in the face of falling coal spreads and from the recent reaffirmation from all political parties of their intention to aggressively move the UK away from coal and other fossil fuels.
“In our business model we are assuming that at least 10GW of the current 18GW of coal capacity remains on the grid into the mid-2020s.
“That will be enough to sustain our base business and provide sufficient time and opportunity to re-position and broaden the group’s activities.”
See also: The Scottish opencast coal sector was almost entirely wiped out in 2013. By New Year 2016, not a single deep coal mine of any size will be operating in Britain –