DaVince Tools Generated data.daff.gov.au/brs/data/warehouse/pe_abarebrs99000191/dp90.1_coal.pdfand the United Kingdom: scenario 1 23 15 Steaming coal: average cif prices in principal

DBXUSSl0N mrER 90.1 REFORM OF INTERNATIONAL COAL PROTECTION: IMPLICATIONS FOR AUSTRALIA AND WORLD TRADE

LWDSWY JOI,LYF TClN"8' BECK AND ERIC SAVAGE

BUREAU OF AGRICULTURAL

AUSTRALIAN GOVERNMENT PUBLISHING SERVICE CANBERRA

O Commonwealth of Australia 1990

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, 1 news reporting, criticism or review. Selected passages, tables or diagrams may be I

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ISSN 1030-9527 ISBN 0 644 11718 4

Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601

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Protective support measures are afforded to high cost indigenous coal industries in several European countries and Japan. Much of the hard coal produced in these countries would not be comwtitive with

I imported coal without slch support. 1 Australia, along with other major world I exporters of coal has a strong interest in

seeing protectionist support policies for coal removed.

Most counties affording protection to their indigenous coal industries are already taking steps to reduce assistance and open domestic markets to international competition. Pressure for more rapid policy reform is growing as the European Community moves toward a freer internal energy market by 1992. Australia has also been pressing to have coal subsidies effectively addressed in the Uruguay Round of Multilateral Trade Negotiations.

The issue from Australia's viewpoint is not if and when reform will begin but the extent and pace of reform and its impact on world hard coal markets during the 1990s.

Accordingly, a forward looking approach has been adopted for this study.

Results from the study provide evidence that a more rapid and extensive reform of protectionist coal policies would generate substantial trade benefits for Australia and the other major coal exporting countries, including the United States, over the coming decade.

Those countries supporting their coal industries would also gain by reforming their protectionist policies as the direct budgetary costs of support are lowered and distortions to resource allocation in the wider economy are removed.

BRIAN FISHER Executive Director

Australian Bureau of Agricultural and Resource Economics

January 1990

Acknowledgments

The research described in this report was supported by a grant under the National Energy Research, Development and Demonstration Program.

CONTENTS Summary 1

1 Introduction 4

2 Background 5 2.1 The pattern of world coal trade 5 2.2 Protectionism in world trade 8

3 The analytical method 3.1 The modelling framework: WOCTES 3.2 Application of WOCTES

4 Model simulations: steaming coal 4.1 The base case 4.2 Scenario 1: elimination of protection by 2000 4.3 Scenario 2: moderately accelerated reform 4.4 Comparison of scenarios 1 and 2 4.5 Sensitivity analysis 4.6 Conclusions 4.7 Implications for Australia

5 Model simulations: coking coal 5.1 The base case 5.2 Elimination of protection by 2000 5.3 Sensitivity analysis 5.4 Conclusions 5.5 Implications for Australia

6 Conclusions 38

Appendixes

A Country studies 40

A1 Toward a single European energy market A2 The United Kingdom A3 Federal Republic of Germany A4 Spain A5 France A6 Belgium A7 Japan

B Mode1 assumptions and validation 66

B1 Demand side 66 B2 Supply side 66 B3 Shipping costs 68 B4 Validation of model 70

C Sensitivity of results to model parameters and other factors 71

C1 Steaming coal 71 C2 Coking coal 73 C3 Other economic factors 74

References 76

List of figures and tables

1 A Shares of world seaborne steaming coal trade, 1988 5 I 1 B Seaborne steaming coal exports by major exporters, 1988 I

C World seaborne steaming coal trading patterns, 1988

D Shares of world seaborne coking coal trade, 1988

E Seaborne coking coal exports by major exporters, 1988 8

F World seaborne coking coal trading patterns, 1988 8

G Two-country representation of international trade 15

H Steaming coal, scenario 1 : change in imports relative to base case 24

I Steaming coal, scenario 1: changes in imports (relative to base case) by source 24

J Steaming coal, scenario 2: changes in imports relative to base case 26

K Steaming coal, scenario 2: changes in imports (relative to base case) by source 26

L Steaming coal: world seaborne trade 28

M World trade in steaming coal: difference between scenario 1 and scenario 2 28

N Coking coal, with removal of protection: change in European imports by source 35

0 UK hard coal production 42

P Germany FR hard coal production 46

Q Electricity prices in Europe: 1987 49

R French hard coal production 56

S Shifts in coal industry supply curve as support measures are removed 68

Tables

1 World hard coal trade 5

vii

2 Average pit-head prices (before subsidies) and import prices of hard coal in major protected markets: 1986 9

3 Financial support for coal production: producer subsidy equivalent 10

4 Coal production in protecting countries 10

5 Underground work force in the coal industries of protecting countries 11

6 Supply sources of major importers

7 Steaming coal: constant elasticity demand functions

8 Steaming coal: indigenous production of importing regions: base case 19

9 Steaming coal: projected seaborne imports by region: base case 20

10 Steaming coal: projected supply by source: base case 21

11 Steaming coal: major trade flows: base case 21

12 Steaming coal: average cif prices in principal demand regions: base case 22

13 Steaming coal: assumed indigenous production of importing regions: scenario 1 22

14 Steaming coal: supply functions for the Federal Republic of Germany and the United Kingdom: scenario 1 23

15 Steaming coal: average cif prices in principal demand regions: scenario 1 24

16 Steaming coal: assumed production of importing regions: scenario 2 25

17 Steaming coal: supply functions for the Federal Republic of Germany and the United Kingdom: scenario 2 25

18 Steaming coal: average cif prices in principal demand regions: scenario 2 27

19 Simulation results for Australia's steaming coal export performance: changes relative to base case 29

20 Coking coal: constant elasticity demand functions 31

21 Coking coal: indigenous production of importing regions: base case 32

22 Coking coal: projected seaborne imports by region: base case 32

23 Coking coal: projected supply by source: base case 33

24 Coking coal: major trade flows: base case 34

25 Coking coal: average cif prices in principal demand regions: base case 34 - viii

26 Coking coal: supply functions for the Federal Republic of Germany: removal of protection

27 Simulation results for Australia's coking coal export performance: changes relative to base case

28 Shares of fuels in United Kingdom electricity production

29 United Kingdom: prices paid for fuel for electricity generation

30 Coal imports: United Kingdom

31 Assistance to United Kingdom coal producers

32 Coal imports: Federal Republic of Germany

33 Assistance to Federal Republic of Germany coal producers

34 Coal imports: Spain

35 Assistance to Spanish coal producers

36 Coal imports: France

37 Coal and electricity purchases by EdF from CdF

38 Coal imports: Belgium

39 Assistance to Belgian coal producers

40 Coal imports: Japan

41 Assistance to Japanese coal producers

42 Coal importers' diversity constraints

43 Linear supply curves for major exporters

44 Projected exports of 'inelastic' suppliers

45 Ocean transport costs

46 Actual and simulated seaborne trade: 1987

Glossary

Hard coal Coal of gross calorific value greater than 5700 kcal/kg (23865 kJ/kg) on an ash-free but moist basis. Hard coal comprises bituminous coal and anthracite, and excludes brown coals and lignite.

Coking coal Abituminous coal of a quality that allows conversion into coke suitable for use in a blast furnace; also known as metallurgical coal.

Coke A hard dry carbon, structurally stronger than coal, produced by heating coking coal to very high temperatures in the absence of air. Coke is combined with iron ore and limestone in a blast furnace to produce pig iron.

I Gross calorific value The amount of heat energy released when a unit mass of fuel bums completely.

I Steaming coal A bituminous coal used for steam raising (for electricity generation and industrial purposes) and space heating. Steaming coal includes all anthracite coals and bituminous

I coals not included under coking coal; also known as thermal coal.

1 Lignite

tce

Raw coal

Saleable coal

Coal with a gross calorific value less than 4165 Kcal (17 435 kJ/kg) and more than 31 per cent volatile matter on a dry ash-free basis.

Tonne of coal equivalent: the quantity of any fugl which, when burned completely, releases 29.31 GJ (7 x 10 kcal) of heat energy.

Gross or 'as mined' coal, prior to treatment for removal of unwanted material in coal washeries.

Raw coal production less washery rejects.

Protectionist policies designed to support high cost producers of hard coal remain in force in Europe and Japan, but are in process of reform. This paper provides an assessment of the impact on world trade and prices of such reform.

Protectionism in world trade High levels of assistance are provided to indigenous hard coal industries in several European countries, including the Federal Republic of Germany, the United King- dom, Spain, France and Belgium, and in Japan. Support commonly involves supply agreements between coal producers and electricity utilities and steel makers, together with quotas and tariffs on imported coal. Such protective policies tend to be justified by governments as assuring security of energy supplies, avoiding the high short term social costs of closing down regionally concentrated mining operations, and allowing local coal mining industries to become, over time, more competitive with imported coal. However, protecting high cost indigenous coal industries is likely to lead to significant economic costs. Apart from the burden on taxpayers and consumers of funding the support measures, such policies lead to a misallocation of resources and reduce growth and employment opportunities in other sectors of the economy.

Production costs for hard coal are high in these countries, reflecting generally unfavourable geological conditions (deep and thin coal seams) in comparison with the major coal exporting countries - Australia, the United States, South Africa and Canada. Much of the hard coal produced in Europe and Japan would not be competitive with imported coal if assistance were removed. In 1988, production of hard coal in the highly protected countries amounted to around

210 Mt, equal to around 70 per cent of world seaborne trade in hard coal in that year.

During the mid-1980s as world coal prices fell and as exchange rates realigned, the level of support per tonne of coal produced rose substantially, despite actions of governments to limit support. Nevertheless, production in the protecting countries has fallen by around 20 per cent since 1980, reflecting the lack of competitiveness of indigenous coal against imported coal and the effects of government rationalisation programs. Indigenous production in Europe and Japan is likely to continue declining during the 1990s even without new initiatives for policy reform. Governments in France, Belgium, the United Kingdom and Japan have all announced plans that will result in lower production. German production of coal is also expected to fall. Additional pressures for reform of coal support policies are likely to arise with the move toward a common energy market in the European Community and with the privatisation of the UK electricity industry. The issue of coal protection is also being addressed within the current round of GATT negotiations.

Australia, along with other world exporters of hard coal, has a strong interest in seeing protection of coal production removed in Europe and Japan. Significant additional import demand arising in these countries as policies are reformed would be likely to lead to substantial increases in world trade and raise world prices for hard coal.

Evaluating the effects of reduced protection The main analytical tools used in this study are world trade models for steaming coal and for coking coal. These trade models are used to estimate the effects of reduced

Coal protection reform 1

protection on world seaborne trade patterns and prices during the 1990s. This is done by comparing alternative policy simulations: a base case simulation derived from IEA data representing anticipated demand and supply conditions (including announced policy reforms) during the 1990s, and two alternative simulations assuming more rapid and extensive policy reform. In the first of these alternative simulations, protection of the European

I and Japanese coal industries is assumed to be phased out completely by the year 2000.

I In the second, a more conservative, but still accelerated, rate of reform is assumed.

I From the differences in the model results, estimates can be made of the gains to world trade and price levels that would flow from

I any new deregulatory initiatives. The assumptions and parameters used

I in the model were largely derived from a set of country studies, reported here, in which the effects of protection on

1 indigenous coal production and imports were assessed. Current and proposed plans

~ for the rationalisation of high-cost coal mines and for the reform of support policies during the 1990s were taken into account in setting up the alternative

I simulations.

The estimates of the gains to world trade and price levels mostly reflect the rate of reform and the proportion of each indigenous coal industry that remains competitive as coal industry protection is removed. Should reform extend to energy products other than coal, import demand for coal would be influenced accordingly. A similar qualification to the results reported in this study applies to any future changes in environmental policies that may be adopted around the world over the ten year period of analysis.

Model results I It is found that substantial increases in

world seaborne trade of steaming coal 1 would arise from the removal of coal

industry protection in Europe and Japan. By 2000, annual world trade could be increased by 60 Mt (20 per cent) relative to the base case. World prices by 2000 (in 1987 values) could be increased by US$3.60/t

2

(6.5 per cent). Under more conservative assumptions as to the possible acceleration in the rate of reform, the increase in world trade would still approach 40 Mt, with a 5 per cent increase in world price.

The shares of the major steaming coal exporters - Australia, the United States, and South Africa - in the increased level of world trade are dependent on their supply costs and on the supply diversification goals of importers. However, it is estimated that Australia would gain 22 Mt of the above increase in steaming coal trade (or some 13 Mt under more conservative assumptions). Part of this gain would serve to offset a decline which is otherwise forecast in Australia's exports to Europe. Thus liberalisation of protectionist policies in Europe appears necessary if Australia is to maintain a strong presence in the European steaming coal market.

The Federal Republic of Germany is the only major producer of coking coal and this industry is highly protected. The potential gains from liberalisation are therefore smaller than for steaming coal. The results of the analysis suggest that world seaborne trade in coking coal could be around 12 Mt (7 per cent) greater by 2000 if the industry in Germany and in other minor producing countries ceased to be protected by that year; the estimated increase in world prices (in 1987 values) would be around US$3.30/t (4 per cent).

Australia and the United States share the increase in coking coal trade, but the shares depend on the degree of supply diversification chosen by German importers as their imports increase. Australia was estimated to gain 7 Mt by 2000. The above figures are based on the assumption that no more than 45 per cent of imports to Europe could originate from one supplier in any one year. Gains to Australia would be lower if this diversification constraint were relaxed, reflecting lower cif costs of United States coal to European destinations.

Implications for Australia Taking account of both the increased volumes and the higher world prices

Discussion paper 90.1

associated with removal of protectionist policies in Europe and Japan, Australia stands to gain up to $A2.6b per annum (23 per cent additional coal export revenue) by the year 2000 (in 1987 dollars), over and above the significant gains in export earnings which are projected in the base case. Annual gains prior to 2000 are also likely to be substantial. Gains in export revenue by 1992 were estimated to be up to $A1.2b (12 per cent), and by 1995, up to $A2.0b (20 per cent).

Coal protection reform

I I

1. Introduction

Several industrialised countries provide high levels of assistance to their coal industries: in particular, European countries including the Federal Republic of Germany, the United Kingdom, France, Spain and Belgium, together with Japan. In all these countries, average costs of production are high compared with the costs of major world exporters, and much of their production would not be competitive if fully exposed to international competition.

Additional import demand in European countries and, to a lesser extent, Japan, arising from reduced domestic assistance would be likely to lead to a substantial increase in world coal trade. The shares of the major exporters - Australia, the United States, South Africa and Canada - would depend on their competitiveness in Europe and Japan and on the supply diversification goals of importing countries. In this study the potential effects of removing protection of indigenous coal industries and markets on world coal trade patterns and prices are assessed using world trade models for steaming coal and coking coal.

Several European countries and Japan have already taken steps to rationalise their small domestic coal industries during the 1990s, in response to the high budgetary costs of support. However, significant new initiatives would be required to bring about the removal of all assistance to high cost coal producing countries in this period. The Australian and other governments have made efforts to have coal subsidies addressed effectively through the Uruguay round of GATT multilateral trade negotiations. Moves toward a European single market also present opportunities and incentives for coal assistance policies in high cost countries to be reformed or removed altogether.

In the next chapter of this report the background to world hard coal trading

- - -

patterns is reviewed and the extent of protection in world coal trade is established. In chapter 3 a framework for modelling world trade in coal is presented and its application to the simulation of the effects of reduced coal protection on world coal markets explained. Simulation results are presented in chapter 4 for steaming coal and in chapter 5 for coking coal. The major conclusions from the study are drawn in chapter 6.


This chapter presents a review of major patterns in world trade in hard coal over recent years showing the relative sizes of the European and Japanese markets, and of export sources (among which, Australia has been the largest exporter of hard coal since the mid-1980s). The extent and level

/ of protection are reviewed, indicating that its removal could result in substantial increases in trade.

2.1 The pattern of world coal trade Around 10 per cent of world hard coal production is traded; coking and steaming coals have approximately equal shares in this trade (see table 1). Total seaborne trade has developed from around 100 Mt in the early 1970s to an estimated 307 Mt in 1988 - an annual average increase of around 7 per cent - while land trade has diminished.

World seaborne trade in steaming coal has increased sevenfold since 1973. The stimulus to this growth was the high price

A Shares of world seaborne steaming coal trade, 1988

ABARE chart Importers Other 8%

Other T

Poland and USSR States 12% 13%

of crude oil after 1973. Steaming coal could compete as a source of energy, allowing conversion from oil- to coal-fired capacity, and ar, increasing reliance on coal in the power generation sector, to take place around the world. During the 1980s, Japan

1 World hard coal trade

Coking Steaming

Total Seaborne Total Seaborne

Mt Mt % Mt Mt 70

Sources: Randle and McCloskey (1988, p.8), IEA (1 989a), ABARE.


- - - - - - - - - - -

has become the single largest importer of seaborne steaming coal, accounting for 23 per cent in 1988 (see figure A). Europe has increased its seaborne imports at a slower pace than North Asia, but remains the major market for steaming coal, at around 62 Mt (43 per cent of trade).

Among the exporters of steaming coal, Australia and South Africa dominate, accounting for 29 per cent and 25 per cent respectively in 1988 (see figure A). Australia's prominence dates only from the early 1980s (see figure B), when new coal mines were opened to service rising demand for steaming coal in Asia, especially Japan. In 1988, Japan was the largest market for Australian steaming coal (see figure C). South Africa and the United States are the main suppliers to European markets, and Australian and South Africa to Asian markets. Exports from the United States have fluctuated markedly. The large size of its domestic industry, together with excess port capacity, allow the United States to swing in and out of the export market as export prices rise and fall and as the value of its currency changes. Most US exports are to Europe (see figure C). Other major exporters include the Soviet Union and Poland, and in more recent years new exporters have emerged including China, Colombia and Venezuela. New suppliers in South America have a freight advantage in

Seaborne steamin coal exports by B major exporters, 5 8 8 ABARE chart

United States 30

supplying Europe relativeyo other po&ible destinations while China and Indonesia 1980 1982 1984 1986 1988

(another potential supplier) are closer to Asian markets. There exists large export South Africa potential in these countries.

In 1987 and early 1988, steaming coal A n

prices were exceptionally low - in fact, insufficient to provide capital cost recovery, or even to cover operating costs, for much of the world's coal export industry - a situation which was not sustainable. Prices recovered significantly later in 1988 and again in 1989, reflecting rises in demand for steaming coal in the electricity sectors of North Asian countries and lower-than- expected export supplies in most exporting countries.

Growth in coking coal trade since 1970 has reflected growth in steel production, particularly in Asian countries. Japan in the 1980 1982 1984 1986 1988

1960s and 1970s, and the newly

6 Discussion paper 40.1

C World seaborne steaming coal industrialised economies of the Republic of trading patterns, 1988 Korea and Taiwan in the 1970s and 1980s,

Australian exports ABAIZE chart 42.5 Mt

Other 1.8%

United States exports 19 Mt

Other 22.

Japan 9.5%

Europe 63.6%

South African exnorts

Japan 6.1%

had insufficient low cost domestic supplies of coal to meet growing demand in steel making. Seabome trade in coking coal increased from 87 Mt in 1973 to around 162 Mt in 1988. Japan remains the world's largest importer of coking coal, accounting for 43 per cent of seaborne trade in 1988 (see figure D) while Europe accounts for 31 per cent.

Australia and the United States dominate exports of coking coal, accounting for 36 per cent and 31 per cent respectively of seaborne trade in 1988 (see figure Dl. Other exporters include Canada, the Soviet Union and Poland. Australia's exports expanded rapidly in line with

of ihe japan&! ind Asian steel industries during the 1970s, but growth in exports during the 1980s (see figure E) has been mainly to the European market. Overall, Japan and other Asian countries account for the bulk of Australian coking coal exports (see figure F) but Europe remains important, accounting for around 15 per cent of Australia's export volume in 1988. Exports by the United States, though variable, dominate coking coal imports into Europe.

Coking coal prices, like those of steaming coal, have been depressed and are now recovering as supply tightens and demand strengthens in Asia and Japan.

D Shares of world seaborne coking coal trade, 1988

Importers ABAlZE chart

Other 7% 10%


Seaborne coking coal exports by E major exporters, 1988 ABAaEcbm

Australia

F World seaborne coking coal trading patterns, 1988

Australian coking coal exports ABARE chart

57.8 Mt Other 4-6% Western Europe

United States ABARE chart 2.2 Protectionism in world trade

European countries affording assistance to their domestic coal mining industries include Belgium, the Federal Republic of Germany, Spain, France and the United Kingdom. Japan is the major industrialised country outside Europe providing high levels of assistance to its small domestic industry. Arguments used by these governments for maintaining assistance include energy security, high short-term social costs of closing down regionally concentrated mininrr operations, and a need for adjustrneGt ind restructuring

lg80 lg8' lgS4 programs to make local coal more ABARE chart

competitive with imported coal. Most of Canada the indigenous production in these

50 counties is sold domestically. Anumber of minor producers of hard coal in Asia,

40 including Thailand, the Philippines, Taiwan and the Republic of Korea,

30 maintain some degree of protection to indigenous energy industries. However, the production involved is small and removal of protectionist policies in these counties would have only a minimal impact on world trade and prices. For these reasons, the industries in these countries are not explicitly modelled in this study.

Total ~roduction of hard coal from 1980 1982 1984 1986 1988 protectedindustries amounted to around

210 Mt in 1988, equal to around 70 per cent of world seabome coal trade. Production


Average pit-head prices (before subsidies) and import prices of hard coal in 2 major protected coal markets: 1986

France Germany FR United Kingdom Japan

Stearninn coal

Indigenous Imports from production non-EEC

countries US$/t a US$/t a

Coking coal

Indigenous Imports from production non-EEC

countries U S / t a US$/t a

costs in these coal industries are well above world market prices for coal. The IEA (1988a) estimated production costs in major protected coal industries for 1986 and compared these with world prices (see table 2). Although the gap between costs and world prices may have narrowed somewhat during 1988 and 1989, reflecting higher world prices for coal and some gains in mining efficiency the differences remain substantial. Much of the production in these countries would cease if exposed to international competition. The high production costs in Europe and Japan are due to unfavourable mining conditions compared with the major world exporters. Much of the production is from underground mines which are relatively deep and in which seams are thin compared with underground mines in the United States and Australia. Productivity is therefore lower than in major exporting countries. Much of the coal entering world trade is from open-cut mines where costs per unit of saleable coal are generally low.

Government assistance measures mostly entail protection against imported coal, by means of long term supply agreements, price supports, government purchases, tariffs, import licences and quotas. There are also numerous measures designed to maintain and/or expand indigenous coal production including grants to production, investment subsidies, coverage of operating losses of coal companies (both public and private), preferential loan credits, capital grants, labour and tax benefits, and export marketing assistance. Other types of

Coal pmtection reform

financial assistance provided by governments are research and development funds and environmental grants for restoring lands mined in the past. Details of specific policies for Germany, the United Kingdom, Spain, France, Belgium and Japan are provided in appendix A.

Assistance to indigenous coal production has been recently reviewed in two reports, IEA (19884 and US Department of Commerce (1989). The IEA has quantified the amount of assistance given to coal production in IEA countries, using a summary measure of support, the producer subsidy equivalent. This is a monetary value of direct and indirect financial support.

As shown in table 3, the level of support is of the same order as pit-head prices, and has been rising in most of the countries shown despite actions taken by governments to limit their support. The increase has been strongly influenced by the decline in the price of coal in international trade during the mid-1980s and depreciation of the currencies of the main exporters in relation to the supporting countries.

Restructuring policies have led to some reduction in production in protected countries during the 1980s - see table 4. The underground coalmining workforce has declined (see table 5 ) as some mines with no long term prospect of profitability have been closed or had their support withdrawn. In some countries there are plans for further rationalisation through government adjustment assistance in closing high-cost mines.

9

3 Financial support for coal production: producer subsidy equivalent a

Year b Country 1982 1983 1984 1985 1986 1987 Total U S m US$m US$m US$m U S m U S m

Selgium 171 143 169 1 74 301 425 Germany FR 1 703 2000 2 346 1 975 3 463 5815 , Japan 295 543 605 806 1 126 1 330 Spain na na na na na 367 United Kingdom 1 025 1 997 3 193 c 583 1 634 na

Per tonne US$ US$ U S U S U S US$

Belgium 26 23 27 28 52 96 Germany 19 24 30 24 43 71 Japan 17 33 36 49 74 93 Spain na na na na na 19 United Kingdom 9 19 75c 6 16 na

a Current dollars; including the effects of long term arrangements between coal producers and major coal consumers. b For United Kingdom and Japan, fiscal years beginning April 1 of year shown; calendar years in other cases. c Includes additional support to cover costs &ing froG the ye$-long &-ergs sf&. Part of this additioh support, here allocated to FY 1984-85, was used to cover costs arising in M 1985-86. naNot available. Source: IEA (1988~).

Although trade in hard coal has been growing in the 1980s, government assistance and other policy measures have limited this growth. Highxost indigenous coal is mainly used in electricity generation. Consequently, reduction of protection in Europe and Japan would increase world trade in steaming coal far more than in coking coal.

Not only does assistance to indigenous coal industries present barriers to world trade, it imposes costs on the economies of the protecting countries. These costs include both direct support expenditures, and the economic costs arising from

distortions in price relativities. For example, support to indigenous coal will distort the choice of inputs used in the power generation sector, and thus increase electricity charges to consumers and industry. More generally the policies insulate domestic producers and consumers from changes in world market prices and lead to a misallocation of resources in the economy. In effect protection of the coal industry imposes a tax on other industries. Resources are directed toward the coal industry from less highly supported activities where they would be used more effectively. The

A Coal production in protecting countries a

Caun try

United Kingdom Germany FR Spain France Japan Belgium Total

a Saleable. Source: IEA (1966~).


Underground work force in the member states of the European 5 cod industries of protecting Community move toward a single market. countries Free trade in energy within the European

Community would be part of the general

October process of moving toward a single market. Country 1983 a 1986 a 198, Issues involved in trylng to form a common

1~ fm 1~ energy policy are discussed in Bowen and Simpson (1989) and are summarised in

Belgium 15.8 13.3 8.8 appendix A. Overall, removing energy Germany FR 118.3 107.1 101.6 trade barriers in Europe will not be easy, Spain 37.7 37.4 36.3 with many months or years of negotiation United Kingdom 159.3 IN.o a'.o needed before long established and Japan 13a9 politically sensitive policies are reformed.

Total 347.1 279.7 A more rapid and complete removal of

protectionist assistance to high-cost coal I a Averages for year except where shown. b End of Japanese p r ~ u c e r s during the 1990s will therefore

fiscal yew including workers at open-cut sites. require new initiatives. This paper Source: IEA (1988 a). provides quantitative evidence that a more resource transfers reduce growth and speedy and extensive reform of employment opportunities in other sectors. protectionist coal policies would have Consequently, not only do the substantial positive effects on world trade exporters of coal stand to gain from reform and prices for hard coal over the coming of protectionist coal policies, but so do the decade. economies of those countries supporting their high cost indigenous coal industries.

Most governments supporting high cost indigenous producers of coal have introduced explicit restructuring policies, which will cause production in Europe and Japan to decline during the 1990s. Rationalisation plans for the small coal industries of France, Japan and Belgium are expected to result in substantially lower production and increases in imports. In the United Kingdom, which is a large coal producing nation, the privatisation of the electricity and coal industries over the next few years should result in substantial increases in coal imports to replace high cost domestic coal, and strong competition should develop between imported coal and other energy sources such as natural gas. In the two remaining protecting nations, Germany and Spain, reform of support policies is expected to be slower, despite pressures for reform in these countries coming both from other members of the European Commission, such as France, and from major exporters such as Australia. It appears that the main impediments to more rapid change are political and social.

Pressures for reform of protectionist coal policies in Europe are also arising as

CmJ protection reform 11

3. The analytical method

The main analytical tools used in this study are world trade models for steaming coal and coking coal. The models are used to estimate the likely effects of reduced

I protection of high cost indigenous coal production, in terms of world coal prices and of specific trade flows between exporting and importing countries to the year 2000. Details of the modelling framework are given in this chapter and in appendix B.

Since countries affording protection to their indigenous coal industries are already

I taking steps to reduce it, a forward looking approach has been adopted for this study. A method was chosen which allowed the effects of accelerated rates of deregulation

I to be assessed relative to a base scenario which incorporates already anticipated

I policy reforms. Spatial equilibrium modelling is appropriate in this context, as it enables inter-regional trade flows and world price levels to be explicitly generated. The 'World Coal Trade Expert System' ONOCTES) provides a convenient framework in which to build spatial equilibrium models of world trade in hard coal.

Once a model of world trade in coal has been built, alternative assumptions concerning Europe and Japan can be entered into the model specification. The assumed changes in European and Japanese protection are not represented directly, but as the reductionsin indigenous production which such policy changes would be likely to bring about, based on

I what is known of the industries (see appendix A). The model is then solved to

I generate revised world trade and price I patterns. Differences in trade patterns and

prices between a base simulation and reduced-protection scenarios then provide measures of the gains that could be generated by the reduction of protection.

Other methods of analysis are available for examining other effects of protection

12

policies. A general equilibrium modelling framework, for example, can be used to assess the economy-wide effects of the protection of industries. Also, ex post studies can be undertaken to estimate the historical costs of protection. Since these are not the questions addressed here, such assessments are outside the scope of this study (see appendix C, section 3).

As coal industry protection is removed in Europe and Japan, the volume of coal likely to be imported would not only depend on the rate of reform and the proportion of each indigenous coal industry that remained competitive, but also on trends in end-use demand for energy, policies on imports of gas and electricity and policies concerning 'greenhouse' gas emissions from power stations. The extent of the secondary effects of reduced coal market protection on the wider economies of those countries through changes in the general level of economic activity and trade would also have an impact on coal demand.

Thus the present study deals exclusively with the impact of international coal policy reforms on trade and does not examine other questions concerning energy demand and supply which are worthy of further investigation.

3.1 The modelling framework: WOCTES

The World Coal Trade Expert System (WOCTES) used in this study was developed by Dr C. Kolstad of the Resource Economics Corporation, Illinois (Resource Economics Corporation 1988). It has been used by a number of major international agencies including IEA Coal Research and Wharton Econometric Forecasting Associates.

In WOCTES, a spatial equilibrium modelling structure is used to solve for trading patterns and prices. (WOCTES can

- Discussion paper 90.1

Defining a market description

1

WOCTES can accommodate up to twenty supply regions, twenty demand regions, four types of coal and ten time periods. Up to ten ship sizes and ten different currencies can be included. Characteristics of the coal supply regions, coal demand regions and transportation network are specified in the following ways. R Coal demand in consuming regions is

specified as constant elasticity demand functions (see section 4.1 and appendix B for details).

0 Coal supply in each supply region is specified in one of two ways:

- as linear supply curves for the major supply countries including Australia, the United States, Canada, and South Africa (specified in two parts, operating costs and capital costs, to

also be set up to handle a variety of noncompetitive market situations, but that facility is not required here.) The structure of international coal trade is defined in terms of three components: supply, demand and transport. Thus, sets of information or assumptions for each of these components are required to specify the model. A particular set of figures concerning these three components, together with assumptions about market structure and conduct, can be thought of as a 'market description'. Once a market description has been defined, WOCTES calculates the equilibrium set of prices and trade flows.

allow the representation of producers pricing down to their operating costs in times of a declining market);

- as inelastic sup ly levels insensitive to P changes in wor d coal prices. This is appropriate for smaller coal exporting countries such as Colombia, China, Indonesia, Poland and the Soviet Union, where government policy, infrastructure and/or resource constraints are the overriding factors influencing the level of production and exports, at least over the projection period. Similarly, for small high-cost industries in importing countries such as Spain, France, Belgium and Japan, where government policies insulate coal industries from world price movements, representation as inelastic supply is also appropriate. In Germany and the United Kingdom where the coal industries are relatively large on a world scale, the coal industries are assumed to become price sensitive as protection is removed. For smaller industries removal of protection effectively leads to closure of the industry.

Cl The transportation network is specified in terms of:

- port costs, capacity and size; each supply region and demand region being allocated a single port, of specified annual capacity and maximum vessel size, through which to conduct trade;

- distances between ports; - shipping costs, entered directly or

calculated using an algorithm provided as part of the WOCTES framework (see appendix B).

0 Exchange rates can be modified from one time period to another (though in this study they were held constant at 1987 levels). It is beyond the scope of this study to assess the impact of changing exchange rate relativities between major coal exporting nations on the pattern of world coal trade. All the above data are required for each

time period under consideration. Each period is defined and solved independently, and the period solutions

The models developed for this study are restricted to seabome coal trade. Land- based trade between the United States and Canada is excluded, as is trade within the economies of East Europe. The former is relatively small, and the latter has been planned rather than subject to market forces. A small quantity of coal exported from Germany to other EC countries (around 4.6 Mt in 1988) is also excluded. In view of their limited influence on the seaborne trade with which Australia is concerned, the added complexity created by incorporating these flows into the model was not believed to be justified.


differ as a result of differing input coal imports has remained relatively parameters, particularly those relating to constant in recent years at around 40 per the specification of demand and supply cent for coking coal and 60 per cent for functions. Changing tradeconditionsmust steaming coal. European importers rely be represented by changes in the input heavily on the United States for their parameters, since they are not generated coking coal requirements, but generally dynamically. take no more than 50 per cent from this

source. European markets show even

Defining market conduct In this study the world coal market is represented as a competitive market, but with supply diversification constraints imposed by importers to improve their supply security. Such a representation is appropriate, particularly since Japan's dominance of the coking coal market has declined and the number of supply sources has increased in recent years, thus enhancing the competitive nature of the market.

The existence of diversification constraints is evident both from explicit policy and from observed market behaviour. Major importing countries or regions tend not to import from any one supplier more than 50-60 per cent of total imports in any one year (see table 6). Although Australia is the lowest-priced source of coal to Japan, its share of Japanese

greater supply diversification for steaming coal, for which there is a greater range of sources.

Supply diversification strategies appear to originate in the risk aversion and supply security concerns of individual importing firms and utilities within each importing country. Importers are prepared to buy a proportion of their coal requirements from suppliers other than the lowest priced supplier, to ensure security of supply. Japanese supply diversification strategies are detailed by Anderson (1987), while Drysdale (1988) discusses supply diversification strategies in energy and resource trade in East Asian and Pacific markets. Quality considerations also influence the buying policies of importers, particularly for coking coal where blending is common to achieve desired specifications.

6 Supply sources of major importers

OECD Europe Japan Asia

Source

Coking coal Australia United States Canada Soviet Union and Poland a

Other

Steaming coal Australia United States South Africa Soviet Union and Poland a

Other

a Two model regions combined. Source: Derived from EL4 (1989~).


G 'Ikrecountry representation of If a country removes its protection of its international trade ABARE chaTt domestic coal industry that industry will

contract. Assuming no change in its Europe Price demand function, imports of coal must

increase to achieve a new equilibrium. For exporters to meet the higher import demand, fob prices must increase because

sA mining firms in exporting countries are forced to exploit higher cost reserves. The increase in world price when protection is removed will be determined by the slopes of the supply and demand curves, together with the extent of the contraction in domestic supplies.

I I I The WOCTES model is solved by the I l l

Quantis U Linear Complementarity Programming Imports Exports (LCP) technique using Lemke's algorithm.

This technique is a standard approach to the solving of spatial equilibrium models (Takayama and Labys 1985).

Computing trade patterns and prices in WOCTES For the purposes of this study, in which a competitive world coal market is assumed, WOCTES runs as a standard spatial equilibrium model (in the terminology of Takayama and Labys, 1985). As is typical in such models, a competitive price equi-librium is obtained by maximising total consumer and producer surplus for coal, subject to specific constraints (Kuhn- Tucker conditions), such as transport costs, port capacity and import restrictions placed on particular countries.

To illustrate the principle, consider the simple case of one commodity (coal) and two regions (Australia and Europe) as represented in figure G. In the absence of trade (autarky), equilibriums occur at AA and AE, with prices pa^ and pa^ respectively. Profitable trade can take place if the transport cost ~ A E is less than the price difference pa^ - paE). In that case trade will take place between Australia and Europe at equilibrium positions of BA and BE for Australia and Europe respectively. At the new equilibrium positions total consumer and producer surplus in the two countries together is maximised subject to the transport cost constraint. This

WOCTES trade models in perspective WOCTES was considered suitable for this study because it facilitates effective representation of the seaborne coal transportation network and inter-country trade flows. It allows a quantitative description of the international coal market to be established within which a wide range of market conditions or restrictions can be investigated by altering the input assumptions of the market descriptions. Consequently the focus or detail of the model can be changed to reflect the issue under investigation.

A number of features of the WOCTES framework need to be understood. WOCTES trade models are static in that intertemporal aspects of supply (such as storage, and the role of present and past prices in the formation of the price expectations) are not modelled explicitly. Change over time is not simulated endogenously, but is represented by changes in input parameters.

Supply and demand functions are specified in relatively simple terms: supply curves are linear, and demand curves have constant elasticitv - that is, a eiven

two-counGy treatment can be generalised percentage chang6 in price results inavfixed to many countries, with additional percentage change in consumption (in constraints. ionnes of coal -equivalent). specifying

&I protection reform 15

supply and demand functions in this way allows a model of manageable size to be built which nevertheless incorporates a detailed description of the coal transportation network and other features of the international coal market.

The specification of demand and supply functions for coal in different countries and regions under the protection regimes of interest is based on analyses undertaken outside of WOCTES. This entails the quantitative and qualitative assessment of a large range of factors which affect the demand for hard coal and the supply costs of exporters.

A limitation in using WOCTES is the need to build and solve separate modelsfor steaming coal and coking coal. Kolstad used WOCTES primarily to represent steaming coal trade. Its flexibility allows it to be adapted to coking coal, but linkages between the steaming and coking coal markets are not explicitly included. Any conflicts between model outcomes for steaming and coking coal would need to be addressed by altering demand side assumptions in each model until a consistent outcome is achieved. (Such conflicts did not in fact arise.)

3.2 The application of WOCTES WOCTES market descriptions for the steaming and coking coal markets were developed, incorporating projected indigenous production levels and demand for coal derived from IEA (1989a) and from a series of country studies. For each protecting country the major forms of assistance to the domestic coal industry and market were reviewed, with emphasis on assessing the impact of these polices on coal production and use, and in consequence on import demand. The extent and pace of policy reform and consequent rationalisation of the coal industry in each country were reviewed to the year 2000. These country reviews are presented in appendix A.

Using these market descriptions, base simulations of international trade patterns and prices were generated for steaming

coal and coking coal. These base case simulations are designed to represent scenarios which account for current expectations about the rate of change in supply and demand conditions, including any anticipated changes in industry protection. For all countries with heavily protected coal industries base case domestic supply and demand projections have been based on information provided I by each country and published by the IEA ' (1989~). Accordingly these projections reflect a policy environment in which some degree of policy reform is already anticipated. For steaming coal, two alternative scenarios, differing in the pace and extent of reform of protectionist coal policies - derived from the country studies - were then simulated, and the results compared with the base case. In the first of these scenarios, there is a graduated move towards the complete removal of protectionist coal policies in each country by the year 2000. The impact of removing support policies on indigenous production is incorporated into the WOCTES market description for each country and the model resolved. (For most of the smaller European producers, this entails a cessation of coal mining.) In the second scenario, the pace of reform falls short of complete deregulation by 2000 but reflects proposals that have been put forward by advocates of more rapid reform, but not yet adopted. Specific policies are detailed later in section 4.3 and in appendix A.

For coking coal, only one scenario of policy reform was investigated representing the complete removal of protectionist coal policies by the year 2000. This was because the protected mining industries of the European countries in aggregate produce far less coking coal than steaming coal, and an intermediate reform situation would have led to only minor differences in trade and price impacts compared with the situation of complete removal.

Differences in trade volumes, patterns and world prices between the base and the alternative simulations provide the estimates of the trade gains that would derive from an acceleration in the reform of protectionist coal policies.


4. Model simulations: steaming coal

4.1 The base case To establish a base scenario, WOCTES was set up to model trade flows and prices on the basis of current policies or announced rationalisations of indigenous coal production (as detailed in the country studies) in Europe and Japan. The main base case assumptions concerning demand and supply conditions in high cost producing countries are discussed below. Supply and demand conditions in other countries and regions, including the world's major exporters of hard coal, are specified in appendix B.

The WOCTES description encompasses fourteen demand and nine supply regions for three future years - 1992, 1995 and 2000. These years were chosen to capture changes in trading patterns and prices as a result of short, medium and longer-term policy reforms in countries affording protection to their indigenous coal

industries. Some policy changes could continue to have an impact on world coal trade beyond 2000, but an assessment of such impacts is beyond the scope of this paper. The use of fourteen demand regions reflects a disaggregated approach: there are eight European regions, four Asian regions, and single regions for both South America and the East Mediterranean countries. The nine supply regions include the four major exporters of coal (Australia, the United States, South Africa and Canada) and five smaller, inelastic suppliers to the world market: Colombia and Venezuela; China; Indonesia; the eastern Soviet Union (those fields from which coal is exported to Japan); and Poland and the western Soviet Union. Such a level of disaggregation was considered to offer a representation of world trade appropriate to the issues being investigated. Overall, the model effectively captures all seaborne trade in steaming (and coking) coal.

-

7 Steaming coal: constant elasticity demand functions

Region Value of A a

1992 1995 2000

Germany FR 238.0 239.1 France 126.7 122.7 Spain/ Portugal 156.4 168.1 Italy 122.7 135.9 United Kingdom 284.5 285.6 Denmark 98.5 99.1 Belgium/Netherlands 147.6 152.4 Other Europe 116.6 120.7

Japan 181.7 190.6 220.0 Taiwan/Hongkong 148.6 160.8 178.4 Korea, Rep. of 173.7 180.5 188.0 Other Asia 102.5 113.5 136.4

East Mediterranean 135.5 144.4 176.3

South America 77.6 95.2 125.6

a Demand functions take the form P = A.W, where Pis the price per tonne of coal equivalent (US$/tce, 1987 values), and Q is the quantity of coal demanded in millions of tce and 0 . 4 is the price elastiaty of demand.

Demand side assumptions Constant elasticity demand functions (with quantities expressed in coal equivalents) were specified as described below for each demand region and for the three projection years 1992,1995 and 2000 (table 7). For the OECD countries - that is, for most of the regions simulated - the base demand scenarios primarily reflect the expectations of their governments, in line with expected changes in economic conditions and anticipated effects of the energy, industry and environmental policies of each country. Such forecasts are taken from the International Energy Agency's assessment of world coal ,supply and demand to the year 2000 (IEA 1989a). For some countries the assumptions on which the IEAforecasts are made may reflect policy goals rather than the most likely outcomes. Overall, however, they are the best available estimates of expected demand (and supply) conditions in the absence of major new deregulatory initiatives. IEA


projections were available for OECD member countries only. Comparable demand and supply projections for Asia, East Mediterranean countries and South America were derived from ABARE's long term outlook assessment (ABARE 1989).

The general outlook based on these projections is for strong growth in steaming coal demand to the year 2000, resulting mainly from an anticipated strong growth

I in electricity demand and an expansion of coal's share of power generating capacity. In Asia, the largest increases in demand are expected in the Republic of Korea, Taiwan and Japan. Nearly all European countries are expected to increase their coal requirements for power generation by 2000. For instance, by the mid-1990s the Netherlands and Portugal are expected to commission five new coal-fired plants. France plans to increase output from existing coal-fired plants. Italy's state- owned power authority is implementing programs of expansion in coal fired power stations which could lead to substantial increases in demand.

To specify each demand function, the projected demand levels for steaming coal were coupled with the realised 1988 cif import price for each country assuming a price elasticity of demand of -0.4 (Kolstad and Abbey 1984) in all importing countries. Thus, over time the demand curves are shifted to account for growth in demand for coal as projected by the IEA. Any foreseen changes in these policies likely to affect the demand for coal in each country were addressed in the country studies. The sensitivities of the demand assumptions to such factors are considered in appendix C, section 3.

As discussed in chapter 3, the world steaming coal market can be represented as a competitive market with diversification constraints imposed by importers. The review of historical trade flows showed that importers typically buy a proportion of their requirements from suppliers other than the least-cost supplier, and that a fairly stable pattern can be discerned. Diversification constraints assumed in the model are presented in appendix B (table 39). It is assumed that European countries impose the constraint that no more than 30

18

per cent of imports can be from one source. This constraint includes the effects of the partial boycotts of South African coal in European markets evident during recent years - that is, boycotts by some countries and apparently by some individual user organisations. Since the boycotting of South African coal could become more widespread, the effects of extended boycotts are examined in the sensitivity analysis (appendix C).

Supply side assumptions Supply side assumptions can be divided into two main areas: those concerning supply in the world's major exporting countries, and those relating to the indigenous production of net importers. The main exporting countries and regions in world steaming coal trade are designated as coal supply regions in the model (see chapter 3 and appendix B). Linear supply functions are specified for such exporters; details of these functions are given in appendix B. Smaller exporters were perceived to be insensitive to world prices over the projection period. These include the new suppliers (such as Colombia) where mining and infrastructure development for coal exports is still in the early stages, and countries such as Poland and the Soviet Union where production and exports are assumed to continue to be based on factors other than cost. Projected exports from these countries are set out in appendix B.

In the base case, indigenous supply in each importing country or region has also been specified as price-insensitive. This is because indigenous production in most importing countries is protected from import competition by non-tariff measures, and is therefore primarily policy determined. In the two major European countries which protect their indigenous steaming coal industries, the Federal Republic of Germany and the United Kingdom, the assumption of price- unresponsive supply is relaxed in the two reduced protection scenarios. As the level of assistance is reduced, the UK and West German industries are expected to both contract and become responsive to world

- Discussion paper 90.1

price movements. The indigenous industries of other protecting countries are small relative to world trade and would generally not exist without govenunent intervention. Those of Belgium and France, though not of Spain or Japan, cease production in the first alternative scenario.

The base supply projections for all importing countries, derived in the country studies, are sumrnarised in table 8. Indigenous steaming coal production is projected to decline in all the highly protected countries except Spain and Belgium. In Germany, the United Kingdom, France and Japan, production is projected to fall due to continuing high

1 costs of domestic production and the partial rationalisation goals of government. In the United Kingdom for example, production of steaming coal is projected to fall by 15 per cent indicating partial deregulation of the UK power and coal industries. A projected 30 per cent fall in German steaming coal production by 2000, mostly after 1995, reflects a significant restructuring of the industry when the

present Jahrhundert contract expires in 1995. In Spain, in contrast, government support for the coal industry is projected to remain high, and in Belgium production is unlikely to change. (More rapid and extensive restructuring would be possible, but governments cite social and regional considerations as limiting the rate of reduction in assistance over the medium term.)

Port constraints In the model, there is one port in each supply and demand region. Port characteristics can be specified as a capacity constraint (the volume of coal that can be shipped through the port annually) and a ship size constraint (in deadweight tonnes). A port of average size capability was chosen for each country/region.

On the supply side, a capacity constraint was imposed only for South Africa until 1992. According to recently announced expansion plans for South Africa's Richards Bay, an export capacity of around

8 Steaming coal: indigenous production of importing regions: base case

Region

Germany FR a France Spain/Portugal Italy United Kingdom Belgium/Netherlands Denmark Other Europe Total Europe

Japan Taiwan/Hong Kong Korea, Rep. of Other Asia Total Asia

1987 b 1992 1995 2000 M tce Mtce M tce M tce

East Mediterranean 1.5 2.0 2.0 3.0

South America 0.0 0.0 0.0 0.0

Total 197.3 180.0 177.8 168.8

a Adjusted upward to take account of coking coal used for steaming coal applications. Satrcc: b IEA (1989~).

Coal protection refirm 19

9 Steaming coal: projected seaborne imports by region: base case

I Region

Germany FR France Spain /Portugal Italy United Kingdom Belgium/Netherlands Denmark Other Europe Total Europe

Japan Taiwan/Hong Kong Korea, Rep. of Other Asia Total Asia

I East Mediterranean 8 13 15 25

South America 1 3 5 10

I Total 138 175 210 285

I Source: a Derived from IEA (1989a).

52 Mt would be achievable by that year. In other exporting countries port capacity is assessed to be adequate over the short term, and in the longer term all exporters are assumed to invest in sufficient port infrastructure to allow projected growth in world trade to be realised.

On the demand side, all importers are assumed to invest in additional port and inland transport infrastructure to meet the projected growth in import demand without imposing ship size constraints. This is an important assumption for the United Kingdom in particular, as discussed in the UK country study in Appendix A.

Sea transport rates I

Sea freight rates were projected using an 1 algorithm included as part of WOCTES,

which estimates time charter rates for different sized vessels. Details of the algorithm, and representative freight rates generated by it, are presented in appendix B. Freight rates are held constant over the

20

1992-2000 period. The impact of rising real freight rates are addressed in the sensitivity analysis.

Projected trade and prices Trade In the IEA derived base case, world seaborne trade in steaming coal is projected to more than double from 138 Mt in 1987 to 285 Mt in the year 2000. The imports into the model regions are summarised in table 9. Asia accounts for 69 Mt of the overall 147 Mt growth in world seaborne trade;growth in European imports accounts for 54 Mt. The rate of growth in imports is projected to be fastest in East Mediterranean countries.

Projected shares of world trade by producer are shown in table 10. Between 1987 and 1992 South Africa, exporting about the same volume as Australia, shows the strongest growth in exports. Australia's share of trade falls, because the United States, South Africa and new suppliers -


10 Steaming coal: projected supply by source: base case

Region

Australia United States South Africa Colombia/Venezuela Other Total

Sacrcc: a Derived from IEA (1989~).

particularly Colombia and Venezuela - take the growth in the European market (see table 11). The trend of Australian steaming coal being displaced from European markets is continued in 1995 and 2000 reflecting declining competitiveness of Australian exports relative to other suppliers as world prices rise and exporters return to a situation of full-cost pricing. Australia exports less to Europe in 2000 than in 1987, in consequence of increasing exports from Colombia and Venezuela and the strong competitiveness of US exports as world prices rise. As world prices rise, the United States becomes more competitive with Australia in Europe because their fob

operating costs are higher than fob costs for Australia.

Australia maintains its dominant position in the North Asian market (table 11), though South Africa competes strongly and increases its share of that market.

These projected changes in the shares of the major exporters in world steaming coal trade are determined by relative supply costs (detailed in appendix B) and freight costs. Due to its freight advantage, US coal remains very competitive in Europe during the 1990s despite higher fob production costs compared with Australia and South Africa. In addition, the new suppliers are specified as being insensitive to fluctuations in world prices and therefore

11 Steaming coal: major trade flows: base case

From

Australia Europe 14 23 15 18 13 14 8 7 United States Europe 12 20 21 36 South Africa Europe 19 23 31 36 Colombia/Venezuela Europe 5 16 22 35 Other Europe 18 10 8 6

Australia North Asia b 30 50 30 43 32 37 50 43 United States North Asia 5 8 9 10 South Africa North Asia 14 18 26 35 Other North Asia 10 14 19 21

Australia Other 4 44 9 43 12 44 20 43 United States Other 0 0 0 0 South Africa Other 3 10 12 22 Other Other 2 2 3 5

a Australian shares of the three markets. b Indudes Japan, Republic of Korea, Taiwan and Hong Kong. Sacrcs c Derived from IEA (198%).

Coal pmtection reform

12 Steaming coal: average cif prices in demand regions: base case a

Region 1987 1992 1995 2000 US$/tb US$/t US$/t US$/t

Europe 41.00 53.60 53.30 56.40 Germany FR 44.15 52.40 51.80 55.40 North Asia 40.75 49.40 48.70 54.50 Japan 41.50 50.00 49.50 53.60

Weighted average 40.50 51.70 51.10 55.50

a 1987 values. Sources: b IEA Q988b), Randle and McCloskey (1988).

tend to export at prices marginally less than those of the major exporters. Australia's competitiveness in Europe is investigated further in the sensitivity analysis of the model results (section 4.5 and appendix C).

Prices In the model, equilibrium prices are determined on the basis that importers seek to minimise the cost of fulfilling their coal requirements, subject to freight costs and diversification constraints. Differences in cif prices between countries are due to differences in diversification constraints

and in transportation costs. The range of prices is illustrated in table 12. The weighted world indicator price is calculated using volumes set out in table 11.

Prices rise significantly by 1992 due to the port constraint on low-cost South African steaming coal, and due to the fact that the major exporters will be able to increase supplies only at higher fob costs. Exporters will not invest in extra production capacity unless prices rise to a level where the rate of return expected from new projects is adequate. By 1995, however, world prices fall slightly compared with those in 1992, reflecting the removal of the constraint on South African exports, and anticipated growth in exports from new suppliers.

Thereafter projected prices increase, reflecting the growth in demand. Higher real prices are again required to induce additional supply from the major exporters. (Prices for steaming coal must at the same time remain competitive with those of other energy sources, particularly oil, which are not modelled here. They did not however appear excessive from this standpoint). In the base scenario, cif prices in 1987 US dollar terms are projected to be

13 Steaming coal: assumed indigenous production of importing regions: scenario 1

Germany FR France Spain/Portugal Italy United Kingdom Belgium/Netherlands Denmark Other Europe

Japan Tmwan/Hong Kong South Korea Other Asia Total Asia

East Mediterranean

South America

1987 a 1992 1995 2000 Mtce Mtce Mtce Mtce

Linear supply curves speafied a 3.7 0.0 0.0 8.0 7.0 5.0 0.0 0.0 0.0 Linear supply curves spedfied a 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.3

a See table 14. Source: IEA (1989~).

1 22 Discussion paper 90.1

on average 30 per cent higher in 2000 than countries. (Ideally, such an account would the relatively low prices of 1987. include such factors as the extent of cost

reductions in existing mines, the extent to 4.2 Scenario 1: which production in existing low-cost Elimination of mines can be extended, and the scope for

protection by 2000 developing new low-cost mines.) The derivation of these supply curves is

This scenario represents an outer bound to explained in appendix B. the pace and extent of reductions in protection of indigenous coal production in European countries and Japan. It is based Results on a graduated move to free trade in coal There is an increase in world seaborne by the year 2000. trade of steaming coal, relative to the base

simulation. of around 60 Mt in 2000 (20 Mt 1 Assumptions Demand functions were assumed to be the same as in the base case. Assumptions regarding port size and ocean shipping costs were also unchanged.

Indigenous supply was reduced much more quickly than in the base case in the minor European coal producing countries. The indigenous supply assumptions are given in table 13. Production in France and Japan was assumed to be negligible by 2000; production in Belgium to cease in 1992; and Spanish production to fall considerably.

In the major protected industries of Germany and the United Kingdom, different supply functions (table 14) were specified for each projected year to represent the changing effects of exposure to more open market conditions. There is insufficient information to enable these functions to be based on a full account of the outlook for extraction costs in these

in 1992 and 45 Mt in 1995). This is almost entirely accounted for by the change in European imports; elsewhere, small increases and reductions in trade approximately cancel out. Specifically, most of the increase in world trade is due to the assumed contraction of German and UK industries. Production in Germany falls to 10 Mtce. In the United Kingdom, production falls to 55 Mtce. Imports into Germany and the United Kingdom reach 26 Mt and 17 Mt, respectively, above the base case by 2000 (see figure H).

Of the projected 60 Mt increase in trade to Europe, South Africa gains 22 Mt (assuming that boycotts against South African coal are not extended), while the United States and Australia gain around 19 Mt each (see figure I). Australia gains a significant share of the increased world trade reflecting an improving relative trading position as world trade increases. This is because Australia has a greater capacity to supply increased volumes of

14 Steaming coal: supply functions for the Federal Republic of Germany and the United Kingdom: scenario 1

Country Currency a Year Supply function b

Germany FR c

United Kingdom

a 1987 values. b Specified as: Cost per tonne = a + b. Q, where Q is output (34th c Indudes coking coal used in steaming coal applications. Sources: Crowley (1989) and ABARE.

coal protection refirm 23

strong responsiveness of exporters over the a1987 values. medium to longer terns to demand surges. SOUTU: b IEA (1989b), Randle and McQcxskey (1988).

World prices for steaming coal are 5.4

coal at low cost compared with its Steaming coal: average cif prices competitors. In addition, the importers' 15 in principal demand regions: diversification constraints limit imports scenario 1 a from South Africa which is the least cost supplier to Europe. Australia's exports to Region 1987 1992 199s 2O00 Europe reach 27 Mt by 2000, but gain little US$/t b Us$/t US$/t U%/t to destinations outside of Europe.

Despite the large increase in South Europe 41.00 55.9 56.20 60.50 African supplies to Europe, South Africa Germany 44.15 55.10 55.10 59.70 can still compete with Australia in Asian markets. Similarly, Australia can also meet North Asia 40.75 52.50 52.00 58.50

higher tonnages to Europe while Japan 41.50 52.90 52.40 57.40

per cent @her than in the ba& case in 1992, 6*6 per cent higher in 1995 and 6.5 per cent Steaming coal, scenario 1: changes higher by 2000 (see table 15). Only small I in imports by source price increases are needed by the major - ABARE chart

,

suppliers to bring on extra exports (though Europe 0 2000 price increases in the very short term could 20 be more marked than the model indicates). n

maintaining its dominant position in the weiighted 54.50 5460 59.10 I

North Asian market. This result reflects the

4.3 Scenario 2: Moderatelv Accelerated reform

J

This scenario is based on a program of reform of protectionist coal policies in Europe and Japan which proceeds faster than is at resent anticivated. but falls short

Australia United South States Africa

of achiedng free tradkby 2 h . The extent North Asia of possible reforms is addressed in the 5 c.?? ....,.. .......

H Steaming coal, scenario 1: Change in imports, relative to base case

Australia United South States Africa

Allimportingcountries 0 2 0 0 0

Germany United France Spain Belgium Japan Australia United South FR Kingdom States Africa


16 Steaming coal: assumed production of importing regions: scenario 2

Region

Germany FR France Spain/Portugal Italy United Kingdom Belgiurn/Netherlands Denmark Other Euope

Japan Taiwan/Hong Kong South Korea Other Asia

Mtce 1987 b 1992 1995 2000

Linear supply curves specified a 5.0 3.0 0.0

10.5 8.0 6.0 0.0 0.0 0.0

Linear supply curves specified a 1.0 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.3

Total Asia 37.8 32.5 30.3 26.0



a See table 17. Sourcs: b IEA (1989a).

individual country studies detailed in appendix A. In general, the deregulatory policies assumed in this scenario have been proposed by advocates of more rapid reform of protectionist coal policies, but have not yet been adopted by national governments. In Germany, this scenario allows for a more rapid fall-off of the volume of steaming coal for electricity generation under the Jahrhundert Contract compared with the base case, but less than

that assumed under the graduated removal of all coal support policies in Germany of scenario 1. In the case of the United Kingdom, scenario 2 recognises the possibility that policies may be introduced to moderate the adjustment pressures associated with full privatisation of the electricity and coal industries and the implied free market in coal. There are indications that the UK government is prepared to maintain at least 60 Mt of

17 Steaming coal: Supply functions for the Federal Republic of Germany and the United Kingdom: Scenario 2

Country Currency a Year Supply function b

Germany FR c

United Kingdom

a 1987 values. b Specified as: Cost per tonne a + b. Q, where Q is output (Mt). c Includes coking coal used in steaming coal applications. Source: Crowley (1989) and ABARE.

~ o a ~ protection reform 25

T Steaming coal, scenario 2: Change in imports, relative to base case

steaming coal for electricity generation K Steaming coal, scenario 2: changes sourced from the domestic coal industry. in imports by source

ABARE chart

Europe 0 2000 Assumptions - - a 199.5 ,

ABARE chart

Mt , , , , , , , ,

Again, demand functions were not 10

changed from the base case. The assumed indigenous supply levels are summarised in table 16. The supply functions assumed for Germany and the United Kingdom are set out in table 17. Production in the small high-cost industries of France and Belgium

Germany United France Spain Belgium Japan FR Kingdom

m 1992 -

United Kingdom by 12 Mtce to 73 Mtce. Increases in imports do not, however, fully match the reductions in indigenous production, because consumption is reduced to some extent by higher world prices.

In figure K, the shares of the three major exporters in the increase in trade over base case are shown. Of a projected 36 Mt increase in trade to Europe by 2000, Australia, South Africa and the United States all make gains of 11.5-12.3 Mt. This result is due to the assumed diversification constraints together with the assumption that exports from new suppliers are limited by government policies and/or resource and infrastructure constraints and do not change relative to the base case. Imports to


was again projected to fall to zero by 2000.

I Australia United S 011th

Japanese steaming coal production was States Africa projected to fall to only 2 Mt by that year. North Asia 2000

I 5 Production in Spain was projected to -. 1995 remain constant at around 10 Mt. 1 1992

The assumed supply functions of the Mt major exporters, port constraints, and .... .... .... .... .... n .... .... freight rates remained unchanged from the . .

base case. -5 I Australia United S 011th

Results States Africa

In scenario 2, world seaborne trade in All import countries 0 2000 - -

steaming coal is 9 Mt greater than in the - 1995

increase in trade is to Germany, the United .... .... .... .... .... .... .... .... .... .... .... .... .... Kingdom and Spain, as is shown in figure 5 :.:.:.:. .... .... .... .... .... .:.:.:.: .... J. The higher imports approximately match the fall in production assumed in those countries as assistance is reduced. By 2000, Mt production is projected to fall to 35 Mtce in Germany (a decline of 15 Mtce) and in the Australia United South

States Africa

base case in 1992,26 Mt greater in 1995, and 1 0 39 Mt greater by the year 2000. Most of the

1 1992

Japan increase by only 3 Mt by 1992 and 5 Mt by 2000; Australia gains this increase.

Despite South Africa's significant share of the increase in European trade, South African exports to Asia are reduced only marginally relative to the base case in 1992 and 1995, and increase by around 1.5 Mt in 2000. This result reflects South Africa's supply responsiveness. It suggests that the so-called 'diversion effect' - whereby liberalisation in Europe would divert South African coal to the new European markets, leaving Asian markets for Australia - is small and is unlikely to be sustained over the longer term. Similarly, Australia can meet extra markets in Europe while maintaining its Asian markets.

The effect on world prices of increased trade associated with reduced coal protection is estimated to be modest. In 1992, prices on a cif basis are around 3 per cent higher than those of the base simulation; in 1995,4 per cent higher; and in 2000, some 5 per cent higher (see table 18). The increase in world prices is small due to the high price responsiveness of the world's exporters, particularly Australia, the United States and South Africa; that is, only small increases in prices are required to induce significant additional exports over the longer term. In the short term, however, strong increases in demand for steaming coal would be likely to lead to substantial price rises, due to lags (not represented in the WOCTES model) in the realisation of new export capacity as exporters invest in mine expansions and new mines.

18 Steaming coal: average cif prices in principal demand regions: Scenario 2 a

Region 1987 1992 1995 2000 US$/tb US$/t US$/t US$/t

Europe 41.00 54.80 54.95 59.10 Germany FR 44.15 54.00 53.70 58.20 North Asia 40.75 51.50 50.70 57.10 Japan 41.50 51.70 51.00 56.00

Weighted average 40.50 53.40 53.20 58.30

a 1987 values. Sourcs: b IEA (1989b), Randle and McCloskey (1988).

4.4 Comparison of scenarios 1 and 2 More rapid reduction of assistance to high cost producers of coal in Europe and Japan could generate substantial increases in world trade over the entire projection period (figure L). In 1992, scenario 1 gives twice as great an increase in world seaborne trade in steaming coal, relative to the base simulation, as does scenario 2. In 1995, the increase in trade in scenario 1 is around 19 Mt (74 per cent) above that in scenario 2. By 2000, trade is 22 Mt above scenario 2, a 58 per cent increase in the gain relative to the base case. Nearly all of the additional increase in trade is to Germany, Spain and the United Kingdom (see figure M).

The shares of the three major exporters in the increased trade to Europe are much the same under the two scenarios, reflecting the importance of the assumed diversification constraints of the importers and the relative supply costs of the major exporters. Australia gains relatively more of world trade as protectionist coal policies are removed because its relative cost position improves as trade volumes rise (as discussed in section 4.2). However, in scenario 1, South Africa gains about 3 Mt more of the European trade in the year 2000 than Australia and the United States due to its low costs of supply to Europe.

4.5 Sensitivity analysis Because a number of the demand and supply assumptions used are inherently uncertain, a sensitivity analysis was performed, focussing on the key factors in the steaming coal results: the assumed importer diversification constraints, the relative positions of the supply curves of South Africa, the United States and Australia, and future trends in ocean freight rates. This was done in the case of scenario 2 only; patterns of sensitivity would not differ greatly between the two scenarios.

Details of the sensitivity analysis are presented in appendix C. The removal of importers' diversification constraints in Europe had only a moderate effect on the

a2 protection refinn 27

L Steaming coal: world seaborne trade level of world trade. However, the pattern of world trade would alter with South

ABARE chart Africa increasing its share of the European 325 market and Australia winning a larger

share of markets in Asian and East Mediterranean countries. With respect to sea transport rates, a 20 per cent increase in rates lowered Australia's exports by 5 per cent by 2000, while the drop in South African sales was much smaller.

The analysis also showed that major restrictions on the import of South African coal, such as might result from the extension of partial boycotts during the

Mt projection period, would lead to . substantial rises in European imports of 1992 19-95 4000 relatively higher cost Australian and US

steaming coal. These rises, however, would world trade in caal: be less than the reduction in South African M difference between scenario 1 and tonnages as demand weakens in response scenario 2 to the increased cost of coal. Thus, total World trade, by exporter ABARE chart world trade would be lower than

otherwise. South Africa is the lowest cost fob

supplier of steaming coal, and is therefore important to the overall model solution. The sensitivity of the model to an increase of 10 per cent in South African supply costs was tested; world trade decreased slightly, and exports from Australia increased by 4 per cent.

The model solutions were also fairly sensitive to assumptions made about the supply costs of the United States and Australia. A 10 per cent increase in US

Australia United south world supply costs led to an 8 per cent fall in US States Africa trade exports, which was not fully compensated

by the associated increase in exports by Imports by high cost producers Australia and South Africa. In Australia,

20 0 2000 further increases in productivity through

1 1995 continued improvements in work and management practices can be expected to improve Australia's competitiveness, particularly in European markets.

4.6 Conclusions Accelerated reform of protectionist coal policies in Europe and, to a lesser extent, Japan, could lead to substantial increases in world seaborne trade of steaming coal. The

Germany France B el gi urn results of this analysis suggest that, FR United Spain Japan depending on the extent and rate of policy

Kingdom change, by the year 2000 world trade could


increase by up to 60 Mt (20 per cent) above the level projected for that year in the base case. World prices in 2000 could be increased by up to 6.5 per cent.

The projected shares of the major exporters - Australia, the United States and South Africa -in the increases in trade to Europe and Japan are sensitive to the assumptions made concerning their supply costs (including mining, transport and port costs) and concerning the supply diversification policies of UK and German importers. Under the assumptions used in the trade model the three exporters gain similar amounts of trade - up to 20 Mt each.

The 'diversion effect' - South African coal being diverted to fill the increase in European demand, allowing Australia to expand exports to North Asia - was found to be small, though in the short tenn it could be greater than is revealed by a static model. Continued boycotts of South African coal in Europe were found to hold both positive and negative implications for Australia (see appendix C). Although Australian coal partly replaced South African coal in Europe, more South African coal became available in North Asian markets, with the potential to limit and

even reduce Australia's exports to North Asia.

The relative supply costs of the major exporters are important in determining their share of the increased trade to Europe. Lower Australian supply costs were found to boost Australia's exports to Europe at the expense of US coal, and to make Australia even more competitive in North Asia against South African coal.

4.7 Implications for Australia Australia stands to gain from removal of protectionist coal policies in Europe and Japan in two main ways: first, by any increase in demand for Australian coal in Europe and Japan; and second, by the increase in fob values of all coal exported by Australia. These gains are additional to the projected rise in the gross value of Australian steam coal exports under the base assumptions, which is around $A3.0b (in 1987 values) by 2000. A summary of the mapr trade effects on Australia is presented in table 19. It can be seen that the volume effects are greater than the price effects.

Taking into account both the increased export volumes and the higher unit values

19 Simulation results for Australia's steaming coal export performance: changes relative to base case

Measure Simulation Unit 1992 1995 2000

Exports to Europe

to North Asia

other

Total

Unit value a

Gross value a

Share of world trade

Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2

Percentage p i n k

a 1987 values.

~ o a l protection reform 29

relative to the base case, Australia stands to (around $A4.30/t) over and above the price gain up to $A1.8b (1987 dollars) in its rises generated in the base case. annual steaming coal receipts by 2000. In

I 1992 the gain could be $A0.9bt and in 1995, $A1.5b (see table 19). These values are for the complete removal of protection of the European and Japanese coal industries, by 2000. Under more conservative assumptions as to the possible rate of reform as represented by scenario 2, the increase in Australian returns would be around half of these amounts.

Trade volume effects Increased import demand in Europe in the 1990s following accelerated reform of protectionist coal policies would allow Australia to increase its volume of exports to Europe. In the base case, Australia's steaming coal exports to Europe are projected to fall by around half, to only 8Mt, by the year 2000. Reduced protection in Europe is important, therefore, to Australia increasing exports to Europe above the 1987 level. With a cessation of protection by 2000, Australian annual exports to Europe could reach 27 Mt by that year, and total exports of Australian steaming coal could increase by up to 22 Mt - slightly greater than the gains to the United States and to South Africa in the same circumstances.

Overall, liberalisation could increase Australia's steaming coal exports to 100 Mt by 2000, as compared with the base projection of 78 Mt and the 1987 figure of 47 Mt.

Fob prices The projected increase in the fob price of Australian exports in 1992 under base case assumptions largely reflects the fact that prices realised for steaming coal during 1987 and 1988 were unusually low. Price rises late in 1988, again in 1989, and those

I projected in the base case simulation

I indicate that new production to meet growing demand will not occur without a price incentive. Removal of protection in Europe and Japan was estimated to result in only small additional increases in price


5. Model simulations: coking coal

As for steaming coal, WOCTES was used to set up a world trade model for coking coal in order to project trade flows and prices under different assumptions concerning the pace and extent of coal market deregulation.

5.1 The base case For the base simulation, it was again assumed that current policies and announced rationalisations of indigenous coal production, as detailed in the country studies, are pursued. The main base assumptions concerning demand and supply conditions in protecting countries are discussed below. The same importing and exporting regions and projection years were used as for steaming coal, with the same assumptions concerning port constraints and sea transport costs.

20 Coking coal: constant elasticity demand functions

Value of A a

Region 1992 1995 2000

ER. Germany 78.8 79.0 77.8 France 70.8 70.8 70.6 Spain/Portugal 64.2 64.0 63.7 Italy 98.4 98.6 98.6 United Kingdom 86.6 86.5 86.4 Belgium/Netherlands 78.8 79.0 77.8 Other Europe 79.6 80.1 81.3

Japan 81.5 81.4 80.5 Taiwan/Hong Kong 58.3 59.9 61.0 Korea, Rep. of 68.5 70.1 71.2 Other Asia 70.2 72.6 75.6

East Mediterranean 69.3 70.0 71.3

South America 73.1 74.3 74.9

a Demand functions take the form P = A.P, where Pis the price per tonne of coal equivalent (US$/tce, 1987 values) Q is the quantity of coal demanded in millions of tce, and -0.1 is the price elastiaty of demand.


Demand side assumptions Using IEA (1989~) and ABARE (1989) data, constant-elasticity demand functions were specified in the same manner as for steaming coal. They are presented in table 20. Importer's diversification constraints for coking coal are presented in table 39 of appendix B.

Supply side assumptions Linear supply functions were specified for the three major exporters of coking coal: Australia, the United States and Canada. Unlike the situation for steaming coal, the nature of world coal reserves means that there is little prospect of the emergence of new suppliers over the projection period. Inelastic supply curves were specified for the minor coking coal suppliers, which include China, the Soviet Union, Poland and Colombia. Over the projection period it is assumed that government policy and/or resource and infrastructure constraints in these countries will ovemde price response in determining production and export levels.

Anticipated production trends in importink regio6s were derived in the country studies. There is only one subsidised indigenous coal indus6-y that produces significant quantities of coking coal - that of the Federal Republic of Germany. Coal produced in Germany and used for coking purposes totalled around 25 Mtce in 1988, while that of other European countries totalled around 9 Mtce. (Japanese coking coal production is minimal and is due to be phased out.) As is shown in table 21, indigenous coking coal production in European countries other than Germany is projected to fall by around half (4 Mtce) by 2000, whereas German production is likely to fall by a quarter. As for steaming coal, the base case was derived using the expectations of national

31

21 Coking coal: indigenous production of importing regions: base case

1987 b 1992 c 1995 c 2000 c Region M tce Mtce Mtce M tce

Germany FR a 30.2 27.0 26.6 22.5 France 1.9 2.1 2.1 1.9 Spain/Portugal 0.6 0.0 0.0 0.0

Italy 0.0 0.0 0.0 0.0 United Kingdom 4.1 3.1 2.9 2.9 Belgium/Netherlands 2.0 0.6 0.6 0.6 Denmark 0.0 0.0 0.0 0.0 Other Europe 03 0.0 0.0 0.0 I

Total Europe 39.1 32.8 32.2 27.9

Japan 1.6 0.3 0.0 0.0 Taiwan/Hong Kong 0.0 0.0 0.0 0.0 Korea, Rep. of 0.0 0.0 0.0 0.0 Other Asia 2.5 4.0 6.0 8.0 Total Asia 4.1 4.3 6.0 8.0



Total 45.4 40.6 42.2 40.9

a Adjusted downward to take account of coking coal used for steaming coal applications. Sourcc b lEA (1989a). CABARE (1989).

22 Coking coal: projected seaborne imports by region: base case

Region

Germany FR France Spain/Portugal Italy United Kingdom Belgium/Netherlands Denmark Other E m p e Total Europe

Japan TaiwanlHong Kong Korea, Rep. of Other Asia

Total Asia 80.4 92.5 97.0 95.1

East Mediterranean

South America

Total 1453 156.9 165.0 169.3

S ~ J C C : a Derived from IEA (1989a).

32 Discusswn paper 90.1

23 Coking coal: projected supply by source: base case

Region

Australia United States Canada Other Total

governments as provided to the IEA (1989). The projections of declining production indicate the extent of anticipated policy reform which falls short of full deregulation. European suppliers were specified as insensitive to fluctuations in world coal prices, in view of the high level of government support. The assumption of insensitivity to world prices was relaxed for Germany in the reduced protection scenario.

Projected trade and prices Trade In the IEA derived base case world seaborne trade in coking coal is projected to rise to around 157 Mt by 1992,12 per cent over the 1987 level. Despite projected falling demand in Japan as their steel production falls, small increases in import demand in Europe, together with rising demand in Asia and South America result in world trade increasing to 165 Mt by 1995. The trade continues to increase to reach 169 Mt by the year 2000, as growth in import demand in the newly industrialised Asian countries and in expanding steel industries in South America more than offsets declines in Japanese demand.

Imports into the regions are shown in table 22. Imports into Europe stagnate at around 43 Mt during the 1990s despite projected declining production of coking coal in Germany. This is due to expected declining demand for coking coal in Europe generally. Imports by Japan decline by 6 per cent between 1987 and 2000, in response to changes in industrial structure

away from heavy industry and changes in steelmaking technology. Increasing use of pulverised coal injection (which uses low-ash coal) in Asia generally will act to moderate growth in import demand for high-rank coking coal (Hilly 1989), despite projected increases in steel production in the Republic of Korea and Taiwan. Overall, however, the blast furnace method should remain the dominant steel making technique over the projection period. Coking coal imports into the Republic of Korea, Taiwan and Hong Kong double (to 24 Mt) by the year 2000, reflecting strong growth in economic activity in these newly industrialising countries.

The base shares of world seaborne coking coal exports are shown in table 23. Australia remains the main supplier of coking coal, and the overall balance between the major exporters changes only slightly. Canada marginally increases its export tonnages by 2000; most of the trade increase is shared between Australia and the United States (Canadian sales to Europe, which are very small, are not represented in the model). Australian exports increase by 24 per cent by the year 2000, while US exports increase by 20 per cent.

Unlike the steaming coal situation, Australia is not displaced from the European market under base case assumptions. In fact, Australia's share of the European market rises. With fewer world suppliers of coking coal and the absence of emerging new suppliers with a comparative advantage in supplying Europe, Australia remains competitive. Australia's fob costs for coking coal are low

coal protection reform 33

24 Coking coal: major trade flows: base case

1987 c 1992 1995 2000 Mt %a Mt % Mt % Mt %

From To Australia Europe 12 28 14 33 15 34 16 39 United States Europe 21 20 20 19 Canada Europe b - - - - Other Europe 9 8 8 6

Australia North Asia c 35 46 44 48 45 46 39 46

I United States North Asia 9 10 9 8 Canada North Asia 19 19 17 17 Other North Asia 13 12 16 20

Australia Other United States Other

i Canada Other Other Other

a Australian shares of the three markets. b Not modelled. c Includes Japan, Republic of Korea, Taiwan and Hong Kong. Source: c Derived from IEA (1989a).

enough relative to those of the United States to more than compensate for its freight disadvantage, while US exports are limited by the importer diversification constraints.

Australia continues to dominate the North Asian market (see table 24). Most of the increase in trade to North Asia in the first part of the 1990s is won by Australia, but between 1995 and 2000 Australia loses some of its gains as Japan's demand for coking coal falls and exports to that country from China and the Soviet Union increase. Increased Chinese exports depend on improved infrastructure while Soviet

25 Coking coal: average cif prices in principal demand regions: base case a

1987 1992 1995 2000 US$/tb US$/t U%/t US$/t

Region Europe 55.60 70.60 77.40 78.30 Germany FR 55.50 69.10 75.30 76.85 North Asia 54.20 67.50 74.50 76.00 Japan 54.00 66.90 75.70 75.40

~ Weighted average 54.70 67.80 74.50 74.40

a1987 values. Sourc~s: b IEA (1989b), Randle and McQoskey(l988).

exports could stem from higher production from Japanese sponsored developments in the eastern Soviet Union. Proportionally, Canadian exports to Asia do not fall by as much as those of Australia between 1992 and 2000, primarily because Canada has low supply costs for about 15 Mt of its annual production. Australia, in contrast, is likely to suffer real cost increases in supplying coking coal as open cut operations in Queensland mine to greater depths and investment in new capacity is required.

Prices In the base case, as shown in table 25, coking coal prices are projected to rise substantially above their 1987 levels despite only moderate growth in world trade. Major coking coal exporters are generally less price responsive than steaming coal exporters due to the more limited size of world coking coal reserves and higher cost of recovery relative to steaming coal. (In addition - though this linkage is not modelled - the strong recovery in steaming coal prices which has apparently now begun should support and increase coking coal prices.) Should steaming coal prices rise too far out of line


with coking coal, then lower rank semi-soft coking coals can be switched to steaming coal purposes, raising prices for coking coal and constraining those for steaming coal. The overall price effect of this interaction depends on the responsiveness of exporters and importers of steaming and coking coal to changes in prices.

As for steaming coal, differences in cif prices are due to different diversification constraints and transport costs between regions.

5.2 Elimination of protection by 2000 &ly one scenario is simulated for coking coal and this involves complete elimination of protection by 2000. This approach was taken because Japanese coking coal production is close to being phased out and the protected mining industries in Europe, in aggregate, produce far less coking coal than steaming coal. Consequently, an intermediate reform scenario would have led to only minor differences in trade and price impacts relative to the complete reform scenario.

Assumptions Demand assumptions were as in the base case, as were assumptions regarding port size and shipping costs. Indigenous coking coal supply assumptions for European countries other than Germany and Belgium were the same as in the base case (table 21) - that is, production is halved by 2000. Production in Belgium was assumed to cease in 1992. Linear supply functions were specified for Germany for each year of the projection period (table 26), with the industry becoming smaller but more responsive to world price changes. These supply functions were derived in a manner analogous to the steaming coal supply functions.

Results In this scenario, world seaborne trade in coking coal is 5 Mt higher than in the base case by 1992,6 Mt higher by 1995 and 12 Mt higher by 2000. The trade increase

26 Coking coal: supply functions for the Federal Republic of Germany: removal of protection

Year Currency a Supply function b

a 1987 values. b speafied as: Cost per tonne = a + b. Q where Q is output (Mt). Sourus: Crowley (1989) and ABARE

primarily reflects the fall in German production, which is down to 21 Mtce in 1992,15 Mtce in 1995 and 5 Mtce in 2000.

Figure N shows the shares of the major exporters to Europe - Australia and the United States - in the increase in this trade. Australia and the United States share differently in the 12 Mt gain in trade to Europe, mainly reflecting the assumed diversification constraint of the German market (set at 45 per cent on the basis of trading history to Europe in the mid-1980s), which limits US exports to Europe.

Because of the smallness of the modelled trade effects of liberalisation, the world price effects are very small. Projected world prices show less than a 2 per cent increase above the base case by 1992, around 3 per cent in 1995, and 4 per cent by 2000. However, as for steaming coal, price rises

N Coking coal, with removal of protection: change in European imports by source

000 ABARE chart

Australia United States

Con1 protection reform 35

in the short term could be more substantial because of lags in developing new mining and exporting capacity.

5.3 Sensitivity analysis As with steaming coal, there is uncertainty surrounding many of the parameter values used. Assumptions in three major areas are likely to strongly influence the coking coal results: the supply diversification constraints imposed by European importers, the supply costs of the major exporters, and freight rates. The sensitivity of the model to changes in these factors was assessed, and details of the analysis are provided in appendix C.

The effect of an increase in sea transport rates was only minor. The removal of diversification constraints in Europe, however, had a significant effect on the model results with the level of world seaborne trade increasing by around 10 per cent by 2000 and Australia's share of the European market falling. This result reflects the advantage the United States has in exporting coal to that market.

The model results were also sensitive to variations in the supply costs for Australia and the United States. With increased US supply costs, the United States maintains its dominant position in European markets, but loses market share in more distant markets. As with steaming coal, if further revised management and work practices in Australia for example were to reduce the cif - - -

27 Simulation results for Australia's coking coal export performance: changes relative to base case

Measure Unit 1992 1995 2000

Exports Mt to Europe 3 4 7 to North Asia -1 -1 -1 other 0 1 0 Total 2 4 6

I Unit value a $A/t 1.00 1.77 3.00

I Gross value a $Am 240 522 819

1 Share of Percentage

I world trade points 0 1 1

a 1987 values.

price of Australian coking coal, this leads to useful trade gains in the Asia and East Mediterranean markets, rather than in Europe where the United States maintains a competitive advantage.

5.4 Conclusions Germany is the only country in Europe that has a large indigenous coking coal industry. Reforms in protectionist coal policies for both steaming and coking coals in Germany will affect coking coal production as around 22 Mt of German coking coal is used annually in the power generation sector.

Removal of the protection afforded to coking coal therefore results in much smaller gains to trade than does the same reform for steaming coal. The results from this analysis suggest that world coking coal trade would, by 2000, increase to around 12 Mt (7 per cent) above the level projected in the base case. The increased trade results in small increases in world prices on a cif basis, up by US$3.30/ t in 1987 values (4 per cent).

Australia and the United States share the gain in trade to Europe, gaining 7 Mt and 5 Mt respectively in 2000. Those shares reflect the 45 per cent diversification constraint (limiting US exports) and the relative supply costs of Australian and US coking coal on a cif basis in Europe. If a less restrictive diversification constraint were imposed, Australia would not gain to the same extent.

5.5 Implications for Australia As in the case of steaming coal, Australia is likely to gain in terms of both increased export tonnages to Europe and higher fob prices for its coking coal exports. The analysis presented above suggests that, if coal protection in Europe is removed by 2000, Australia could increase its gross receipts from coking coal sales by around $A0.2b in 1992 and by $A0.5b in 1995 and $A0.8b in 2000 (expressed in 1987 values). This gain is additional to a presently projected increase in the gross value of coking coal exports to 2000 of around


$A3.4b over the 1987 level. A summary of the major trade effects on Australia compared with the base case is presented in table 27.

Coal protection re* 37

6. Conclusions

This analysis of the trade effects of coal industry protection in Europe and Japan indicates that if protection were entirely removed by the year 2000, annual world seaborne steaming coal trade could by that year increase by 60 Mt and coking coal trade by around 12 Mt, relative to the base case. These figures represent a boost to world seaborne trade of up to 20 per cent for steaming coal and around 7 per cent for coking coal during the 1990s.

Such a rate and extent of policy reform might be regarded as unrealistic. But even under conservative assumptions as to the possible acceleration of reform, the likely increase in world steaming coal trade would be some 39 Mt.

The shares of this increased world trade which would be gained by the world's major coal exporters - Australia, the United States, South Africa and Canada - would be determined primarily by their supply costs and the supply diversification goals of importing countries. Resource, mining and transport infrastructure constraints in emerging suppliers such as Colombia and Indonesia mean that these countries are unlikely to share in the gains to trade. The Australian share in the extra trade could be as much as 22 Mt for steaming coal (conservatively, 13 Mt under scenario 2), and up to 7 Mt for coking coal. However, in the case of steaming coal this gain for Australia is relative to a presently projected weakening presence in European markets. Reduced protection in European markets would be required for Australia to maintain and increase its exports to Europe over its 1987 levels.

In relation to market shares, an important finding of the study is that the 'diversion effect' - the diversion of South African coal to supply the bulk of the new European demand (as protection is reduced), leaving North Asian markets for Australia - is likely to be small and unsustainable over the longer run. On the

other hand, should European boycotts of South African coal be extended during the 1990s, Australia could expect increased competition from South African coal in North Asian markets, possibly resulting in greater volume reductions in those markets than the associated increases in tonnages sold to Europe.

Australia and other exporters (including the 'new' suppliers) would also gain from reduced protection in Europe and Japan through higher world prices for coal. World prices for both steaming and coking coal are in any case projected to recover during the 1990s from the low levels of 1987 and early 1988. However, accelerated rationalisation and associated increases in import demand in Europe and Japan could raise world prices for steaming coal (US$ cif) by 6.5 per cent (conservatively, 5 per cent) in 2000; and for coking coal, by up to 4 per cent. The coking coal price effect occurs despite the much smaller increase in trade volume for this type of coal. This is possible because coking coal exporters are less responsive to price changes than steaming coal producers reflecting the nature of cost structures in the industry. These projected price increases are not incompatible with the normal price relativities between steaming and coking coals observed in the market.

Fromboth the increased trade and prices likely to result from full rationalisation of the European and Japanese coal industries, Australia would gain in annual gross export revenue by some $A2.6b (1987 dollars) in 2000, relative to base case projections for that time: a gain of 23 per cent. Under conservative assumptions concerning the rate of reform, the gain would be about $Al.gb (15 per cent).

Although not estimated here additional benefits will accrue to those countries that effectively restructure their high cost indigenous coal industries. The fiscal burden of industry support will be

I 38 Discussion paper 90.1

reduced, resource allocation decisions will be more efficient and economic growth and employment opportunities in other sectors will be enhanced.

The removal of several key policies in specific countries can be highlighted as essential to achieving the gains estimated in the study. First, privatisation of the UK electricity and coal mining industries would have to proceed. Recent uncertainties and problems concerning the overall framework for implementing privatisation in the electricity industry and indications of a transition package for British Coal in adjusting to privatisation should not be allowed to affect the full implementation of privatisation during the next few years.

Second, the two major policies affording protection to the coal industry in the Federal Republic of Germany would have to be removed: the Jahrhundert contract for steaming coal and the Huttenvertrag for coking coal. Both of these policies guarantee use of high-cost domestic coal. Recently, the likelihood of significant restructuring in the German coal industry has increased, with reports that the Jahrhundert contract is unlikely to be extended past 1992. Industry rationalisation plans in France, Belgium and Japan are likely to continue during the 1990s in any case, but Spain's goals for higher domestic coal production in its National Energy Plan would have to be removed.

Pressures for reform will be maintained through European Commission initiatives for a common energy market but would be strengthened by inclusion of coal protection issues in the current round of GAIT negotiations.

Gml protection *eform 39

Appendi>c A Country studies

- --

The overview of protectionism in world coal trade in section 2.2 led to the following countries being identified as offering substantial assistance to their coal mining industries: the United Kingdom, Germany, France, Spain, Belgium and Japan. All except Japan are directly affected by moves toward a free energy market within the European Community. In this section, these developments are first considered, and individual country studies are then presented.

Each country study begins with a brief overview of the country's coal industry, domestic market for coal, and place in the world coal trade. Attentionis then focussed on the current extent of assistance to coal producers and likely future directions in support policy. A base production scenario for the years 1992, 1995 and 2000 is then determined, which incorporates announced reductions in support and the likely extent of closures of high cost mines. Projections of demand and supply conditions in each country have been based on information provided by each country and published by the TEA (1989~). Production levels in each country are then estimated for the two alternative scenarios of accelerated reform to support policies. In the first of these scenarios, there is a graduated move towards the complete removal of protectionist coal policies in each country by 2000. In the second scenario the pace of reform falls short of complete deregulation by 2000, but reflects proposals that have been put forward by advocates of more rapid reform, but not yet adopted by governments. Specific policies are detailed in each country study.

A.l Toward a single European energy market Pressures for reform of protectionist coal policies in European countries are rising as the twelve member states of the European

Community move toward the formation of a single market by 1992. An act ratified by member states in 1986 set a deadline of 31 December 1992 for the removal of remaining barriers to the free movement of goods, services, capital and people among the member states. Free trade in energy within the European Community requires major reform of coal support policies in most of the member states which produce coal. Any assistance provided to coal industries by member governments is now subject to agreement between the member state and the EC Commission. The Commission has authority under article 54 of the ECSC treaty to monitor and approve investment in the EC coal industry. Issues involved in the development of a common energy policy are discussed in Bowen and Simpson (1989).

Progress toward a common energy policy has been stimulated by the release in 1988 of a report by the EC Commission entitled The Internal Energy Market, which provided a detailed inventory of obstacles to competitive trade in energy, including coal, and outlined actions required in order to achieve a single energy market before the end of 1992. The report identified, as major obstacles to free trade in coal between EC Member States, agreements between coal producers and electricity utilities and steelmaking plants, and quotas and import levies designed to restrict coal imports from non-Community countries. The aim of the common energy policy is to increase the international competitiveness of the EC economy by promoting increased EC-wide trade and greater competition in products, while maintaining energy supply security.

The EC Commission has put forward two proposals which aim to increase EC-wide trade in electricity. First, the Commission is seeking approval to publish details regularly of prices paid for electricity by large consumers. The second proposal involves examining the feasibility


of adopting a 'common carrier' principle for intra-EC trade in the electricity market. A common carrier principle would enable local industry to import electricity from other EC member states on a fee for use basis. The French electricity industry has been a major supporter of such a policy.

The French argued in a complaint to the EC Commission in 1989 that the con- tinuation of German coal subsidies limits the potential for exports of their nuclear- generated electricity. The Commission took the step of requiring Germany to submit a plan outlining (to 1993) how its coal industry is to be restructured while also reducing subsidies. Late in 1989, France and Germany agreed upon broad guidelines for future cooperation between their energy sectors, but the agreement did not specify the likely level of French electricity exports to Germany.

Removing trade barriers within the European Community will not be easy. The EC Commission has proposed advisory committees to study the feasibility of adopting the common canier principle (Bowen and Simpson 1989). Decisions taken in response to the advisory committee reports due at the end of 1990 are likely to have an important impact on progress toward removing energy trade barriers in Europe.

The extent to which the move toward a common energy market is likely to lead to changes in the European coal and electricity sectors is uncertain. However, pressure for reform of coal support policies is likely to be significant during the early 1990s.

A.2 The United Kingdom Privatisation of the UK electricity industry in 1989-90, and of British Coal in the early 1990s, will lead to major restructuring of the UK coal industry and its exposure to international competition. The United Kingdom is a large consumer of steaming coal, and although a significant proportion of the UK coal mining industry is likely to survive liberalisation, import demand should increase markedly during the 1990s. It is not certain, however, to what extent 'adjustment packages' for the local

-- - --

industry will slow the growth in use of imported coal.

Overview of the domestic coal industry Since the mid-1950s successive UK governments have heavily subsidised domestic coal production and provided protection against import competition, first from cheap oil imports and later from imported coal (Turner 1985). Despite this assistance the UK coal industry has had a long history of financial losses. UK consumption of steaming coal is large relative to the existing world trade in steaming coal, and liberalisation of the UK market would provide a significant stimulus to the development of world coal trade.

In 1988 the UK industry produced 103.8 Mt of hard coal: 99.5 Mt of steaming coal and 4.3 Mt of coking coal (IEA 1989~1, with around 85 per cent of production coming from underground mines. Almost all coal produced in the United Kingdom is produced by a state-owned monopoly, the British Coal Corporation. The UK electricity sector, now in process of privatisation, has been dominated by the Central Electricity Generating Board (CEGB), also a state-owned monopoly. The Board has been British Coal's largest customer, obtaining 90 per cent of its steaming coal requirements from British Coal and accounting for 80 per cent of the latter's steaming coal sales in 1987 (Prior and McCloskey 1988). In contrast, the coking coal produced by British Coal is a small supplement to the imported coal used by the British Steel Corporation.

The share of coal in UK electricity production in 1987 was 71 per cent (see table 28). This high share reflects the fact that steaming coal for electricity generation has been competitive with other fuels, as is illustrated in table 29, not withstanding high prices of UK steaming coal that result from government support to the UK coal industry.

In response to declining competitiveness and heavy financial losses, the UK coal industry has undergone considerable structural change over the past decade.

41

28 Shares of fuels in United Kingdom electricity production

Year Coal Oil Gas Nuclear Other % % % % %

Source: IEA (1988b).

Production has fallen from 130 Mt in 1980 to 104 Mt in 1988 (figure 0). The rate of adjustment increased sharply following the 1984-85 coal strike, partly as a result of decreased union power (Edwards 1988). Employment in underground mines has declined from 159 000 in 1983 to 87 000 in 1987. British Coal aimed to achieve productivity growth of over 40 per cent during the period 1985 to 1990, with unit cost reductions of a similar magnitude (Prior and McCloskey 1988). Substantial productivity gains and cost reductions have been achieved by workforce reductions, improved management practices, rationalisation of mine capacity (involving closing high-cost mines, extend- ing lowcost mines and developing new mines) and increased capital investment.

Coal trade In 1988 the United Kingdom imported 4.6 Mt of steaming coal and 7.4 Mt of coking coal (table 30). Imports of steaming coal were sourced from many suppliers including Australia (24 per cent) and the United States (22 per cent); suppliers of coking coal were Australia (33 per cent), the United States (44 per cent), Poland (15 per cent) and Canada (7 per cent). The United Kingdom also exports small quantities of steaming coal (though only negligible quantities of coking coal), reflecting the low costs of some UK mines relative to other European counties. In 1988 1.7 Mt of steaming coal was exported to other countries in Europe including Denmark, Ireland, France and Norway.

-- -

Policy directions and implications for imports Details of the United Kingdom's coal industry policy prior to moves to privatise the electricity and coal industries by the early 1990s have been reviewed by Crowley (1989). To maintain production, British Coal has received a substantial amount of assistance including input subsidies, deficiency payments (under- writing of deficits) and domestic purchasing quotas (IEA 1988a). The latter - the major form of assistance - have been on an informal agreement which governs British Coal's sales of steaming coal to the Central Electricity Generating Board (IEA 1988a). Under this agreement the Board purchases coal from British Coal at prices substantially above import parity. The average price paid by the Board to British Coal in 1987 was £42/t (US$69/t), whereas the average import price for the United Kingdom in that year was US$57/t. (Alower price, around US$41.50/t cif, was paid by other EC countries, the difference reflecting high capacity port facilities).

The IEA (1988a) has estimated, using a 'producer subsidy equivalent' measure, that subsidies to the UK coal industry in 1986-87 (the latest year for which data are available) totalled £1.1 billion. This is equivalent to a subsidy of £10.70/t (US$16/t) of coal produced. A summary of assistance measures is set out in table 31.

n, hard coal production

42 Discusswn paper 90.2

29 United Kingdom: Prices paid for fuel for electricity generation a

Year

Heavy fuel oil Natural Steaming gas coal

Including Excludingg tax tax

£/toe b £/toe E/ toe £/toe

a On a heat equivalent basis. b toe = tonne of oil equivalent (1 tce = 0.7 toe). Source: IEA (1986b).

Major restructuring of the industry will Coal to make a profit under deregulation, continue. The UK government has further mine closures and a further announced an end to deficiency payments reduction in UK output is likely to be to British Coal, and will require the r equ id . corporation to compete against imported In addition, the UK govemment has coal without subsidies once privatisation announced and is implementing its takes place early in the 1990s. For British proposals for privatising the electricity

30 Coal imports: United Kingdom

m e and source 1981 1982 1983 1984 1985 1986 1987 1988 e kt kt kt kt kt kt kt kt

Steaming coal Australia 960 459 866 211 2 469 1 548 791 1090 Germany FR 132 334 482 959 746 438 256 181 Poland 11 22 95 619 258 120 132 133 South Africa 80 67 58 257 724 312 188 276 United States 456 395 234 400 498 1 126 388 1014 Other 47 146 277 976 887 753 1534 1909 Total 1 686 1 423 2 012 3 422 5 582 4 297 3289 4603

Coking coal Australia 831 681 1 121 1 648 2 988 2 273 2 668 2 446 Canada - - - 109 337 423 362 518 Poland 131 298 41 4 740 1160 1097 952 1 137 United States 1 498 1 659 908 2 944 2 647 2 434 2 502 3 247 Other 144 2 1 31 18 30 8 42 Total 2604 2 640 2 444 5 472 7 150 6 257 6492 7390

e Estimate Source: IEA, 198%.

C'Z protection reform 43

I

31 Assistance to United Kingdom coal producers

Assistance category Unit 1982183 a 1983184 19W85 1985186 1986187 1987/88 p

Financial aid Deficit grant Em 374 875 2 225 50 288 91 Recruitment of skilled workers Em 11 13 7 21 e 18 16 Coke stocking aids, and aid to promote sales of coal to electricity producers Em 12 0 0 0 0 0

Subtotal Em 397 888 2 232 71 306 107

Price support Excess payment on purchases of steam coal by public elechiaty producers Em 207 442 292 374 805 nd

Producer subsidy equivalent Em 604 1 330 2 524 445 1111 nd Per tonne produced E 5.00 12.60 59.10 4.30 10.70 nd Per tonne produced US$ 8.50 19.00 74.80 5.60 15.70 nd

a Fiscal years: 1 April to 31 March). e IEA Secretariat estimate.nd No data available. p Projected. Source: IEA (198% p. 157).

supply industry (Secretary of State for Energy 1988). It is unlikely that current or future UK governments would hold electricity producers to the specific above- mentioned informal purchasing agreement once they become private companies. Nevertheless, it is possible that future UK governments will provide direct budgetary assistance to the UK coal industry to facilitate adjustment. Assistance for this purpose would not ensure the continued existence of unprofitable mines in the long term, but could have the effect of slowing the required adjustment in the UK industry and hence the rate of growth in imports.

Further, as discussed above, the European Community plans to move toward a common European market in energy, which includes electricity. The United Kingdom already imports a small amount of electricity from France via a cable under the English Channel. As the common market plan is implemented, the UK electricity sector will face increased competition from relatively cheap foreign sources of electricity, especially from France. In this competitive environment, the profitability of a privatised UK electricity sector would depend on access to steaming coal at the lowest possible price. There would then be strong

incentives to expand port capacity to ensure access to, and minimise the cost of, imported coal. As discussed later, however, there would also be incentives for the privatised UK electricity sector to turn to other fuels, such as natural gas.

Increased exposure to import competition is likely to result in a significant contraction of the UK coal industry and increased imports during the 1990s. In August 1989 the two new power generating companies, Power Gen and National Power, issued tenders for imported supplies of coal. At the same time, price negotiations were proceeding between the generating firms and British Coal.

Many factors will determine the future size of a deregulated UK coal industry. Major factors will be the extent of further cost reductions that can be achieved in existing mines, the extent to which production from existing low-cost mines can be extended, and the scope for developing new low-cost mines. In view of the age and depth of a high proportion of UK underground mines it is likely that, in the longer term, substantial investment and technological improvements will be required simply to maintain existing costs. Under the stringent financial constraints

Diswssion paper 90.1

now imposed on British Coal, it may have difficulty raising the necessary funds, and may instead have to channel its investment funds into its lowest-cost mines. This may result in a substantial contraction in the number of operating mines in the United Kingdom.

Expansion of the lower-cost, profitable open-cut sector would significantly reduce British Coal's average costs. However, the open-cut sector faces environmental constraints which may limit its future output (Grimshaw and Smith 1988). New low-cost mine developments likely to come on-stream have a total planned capacity of around 16 Mt a year. In addition to new mines, major expansion programs are currently under way which should add around 3 Mt of capacity at an average cost of around E30/t (US$48/t) (Prior and McCloskey 1988).

Lower UK coal prices due to policy reform, together with continued problems with nuclear power, may result in an increase in the share of coal in total electricity capacity, and thus stronger growth in steaming coal demand. Two new coal-fired power stations, West Burton and Kingsnorth, are proposed for completion by 1995, which will raise coal fired capacity by 3.6 GW. On the other hand, in the longer term environmental concerns may result both in a decline in the utilisation of existing coal-fired capacity and in reduced investment in coal-fired capacity. Environmental concerns may increase the attractiveness of natural gas.

The potential cost savings of imported coal provide a very strong incentive to invest in import infrastructure. Also, there are strong economic incentives to locate new power plants on coastal sites to reduce handling and transport costs. In a competitive electricity market, plants at coastal locations are likely to have a large cost advantage over inland power stations, and in the longer term a gradual relocation of UK power stations to coastal areas would therefore be expected. Press reports during August and September, 1989, (for example, Coal Week International 1989) indicated that National Power is considering building two deepwater ports capable of handling 10 Mt of coal a year.

This would constitute a large increase in port facilities, since present UK import capacity is estimated at only around 20 Mt a year, and most of the ports used are unable to accept large vessels.

Base case and scenario assumptions Base case Based on information provided to the IEA by the UK government (IEA 1989~)~ UK steaming coal production is expected to fall from the 1988 level of 81.5 Mtce to 72.6 Mtce, and that of coking coal from 4 Mtce to 2.9 Mtce, by 2000. Demand for steaming coal is projected to rise from 83 Mtce in 1988 to 94 Mtce in 2000. Coking coal demand is projected to decline only slightly over the 1990s, from an estimated 10.6 Mtce in 1988 to 10 Mtce in 2000.

These trends in indigenous UK production of coal indicate that privatisation of the UK electricity supply industry will proceed, but that the impact of this (and later privatisation of British Coal) on UK coal production is anticipated to be only moderate during the 1990s. This implies the maintenance of some protection of coal production from import competition such as through long-term contracts between British Coal and the corporate successors to CEGB.

Scenario 1 Under this scenario, full exposure of the domestic industry to international competition is assumed by 2000. That is, privatisation of both the UK electricity supply industry and the coal mining industry are fully implemented and the domestic coal industry faces full competition with imported coal by 2000. A comparison of UK production costs for 1986 with import prices based on transshipment from Rotterdam suggests that, in the absence of assistance, about 66 Mt of British Coal's production (out of a total steaming coal production of about 103 Mt) would have been profitable (Crowley 1989). In a free market, the United Kingdom would have been importing around 37 Mt of steaming coal, whereas

Coal protection *efonn

only 4 Mt of steaming coal was imported in 1986.

If the United Kingdom had port facilities for large vessels, transshipment costs from Rotterdam could be avoided and UK importers would face similar import prices to those paid by other European consumers. In this case, an additional 16 Mt of UK production would have been uncompetitive in 1986 (Crowley 1989).

On the basis of these estimates, steaming coal production under a free trade scenario is assumed to fall progressively to 55 Mtce in 2000, down from 81.5 Mtce in 1988, and around 17.6 Mtce lower than the base case level. This estimate was derived using a supply curve for UK steaming coal presented in Crowley (1989).

Coking coal production is unchanged from the base case level. The small number of UK coking coal mines are likely to be largely competitive with imported coal, and continue to supply coal to British Steel Corporation.

Scenario 2 Though a complete cessation of assistance to steaming coal mining by 2000 appears unlikely, a faster rate of restructuring could be achieved than is allowed for in the IEA (base case) projections. It is possible that the UK government will provide assistance to the domestic coal industry to facilitate adjustment. The reported intention of the government is not to allow domestic steaming coal production to fall below 60 Mt (50 Mtce) by 1995 (compared to 75-80 Mt over recent years); this level of UK production has been assumed in this scenario.

A.3 Federal Republic of *

Germany The Federal Republic of Germany is a large consumer of both steaming and coking coals. As a result of protection afforded to high-cost indigenous producers, local production satisfies the bulk of Germany's primary coal requirement. Because of the high cost and lack of competitiveness of Germany's indigenous coal mining industry compared with the world's major exporters of coal, reform of support policies

46

could give a large boost to world trade in hard coal. The German government faces strong political resistance to removing coal industry assistance, but moves initiated by the EC Commission and continued pressure from coal exporting countries should result in some reduction in the level of support during the 1990s.

Overview of the domestic coal industry Germany is one of Europe's largest producers and consumers of coal, mining around 79 Mt of hard coal (coking and steaming coals) and 108 Mt of brown coal in 1988 (see figure PI. Over 95 per cent of Germany's primary coal requirements in tonnage terms are supplied domestically. Despite continuing rationalisation of the industry - which has halved production of hard coal and reduced employment by around two-thirds since 1960 - most German hard coal production is still uneconomic. The decline in German production reflects the substitution for coal of low-cost imported oil, particularly in residential and industrial markets, in the 1960s and early 1970s.

In Germany, brown coal or lignite is largely mined in low-cost open-cut operations, and is competitive with the imported product. In contrast, hard coal production is encouraged by generous assistance provisions, including subsidies

p Germany FR: hard coal production


for production and export, and by import restrictions. In 1987, total subsidies amounted to about DMllb (US$5.8b), or around US$71.70/t (IEA 1988a, pp. 133, 135). Of the European countries that heavily subsidise their domestic coal industries, Germany is the largest potential importer reflecting the size of its domestic energy market and the level of support afforded to its domestic coal industry.

Coking coal production, although generally not competitive with imports, far exceeds domestic requirements, with the result that excess production is being used for thermal purposes. Of an estimated 48 Mt of coking coal produced in 1987, only 26 Mt were used in steel and pig iron production. About 4 Mt of coking coal was exported.

Steaming coal is used largely for electricity generation and to a lesser extent for industrial purposes such as cement manufacture. In 1987, around 34 Mtce (39 Mt actual) of steaming coal, 30 Mtce (108 Mt) of brown coal and about 22 Mtce (22 Mt) of coking coal were used in steaming coal uses (IEA 1989a, Jones and Savage 1989). Electricity generation took up 76 Mtce, the remainder being used mainly in cement manufacture and for heat generation in industrial processes.

Rising costs, falling import prices and a stronger German currency have worsened the competitive position of the German coal industry in recent years. Most of Germany's mines are underground and costs have risen as depths have increased. Some mines are now deeper than 1000 m. Other factors influencing the lack of competitiveness of German coal production include the high costs of controlling pollution (International Monetary Fund 1989, p. 43) and higher wages relative to several other major coal exporting countries (Europe Energy Fortnightly 1988, p. 6).

With falling import prices, assistance to the domestic coal industry has increased dramatically. Recent estimates suggest that less than half of German hard coal production would be competitive with imports in the event of the complete removal of assistance (Blackmore and Randolph 1987, p.61; Coaltrans 1988).

Arguments put forward in support of assistance include the high social cost of closing down regionally concentrated mining operations, energy security, the unsustainability of low coal import prices, and the need for programs aimed at improving the competitiveness of the industry through investment, progressive mine closures and research and development (see Jones and Savage 1989).

Coal trade Germany is a small net importer of hard coal. In 1988 it imported 6.9 Mt of steaming coal and 0.6 Mt of coking coal (table 32) and exported 1.0 Mt of steaming coal and 3.6 Mt of coking coal. The major steaming coal suppliers were South Africa (40 per cent), Poland (24 per cent), United States (8 per cent) and Australia (7 per cent). The major coking coal suppliers were the Soviet Union (34 per cent) and Poland (36 per cent). Australia has been a very small and irregular supplier to Germany, accounting for only 3 per cent of coking coal imports in 1988. Steaming coal was mainly exported to Belgium and the United Kingdom (62 per cent) and to eastern Europe and the Soviet Union (21 per cent). Coking coal was exported to France (31 per cent) and Italy (27 per cent).

Policy directions and implications for imports The administrative arrangements for sub- sidising steaming coal production are quite complex, and are described in detail in other documents (for example, Jones and Savage 1989; International Energy Agency 1988a; Frankfurter Institut 1988). A brief overview is presented here.

Steaming coal Electricity utilities in the Federal Republic of Germany are in a sufficiently uncompetitive market to be able to pass high input costs on to consumers. This is the basis of protection for steaming coal production. A federal statute, commonly called theThird Electricity Production Law, forms the legislative base for assistance measures applying to steaming coal.

- -


32 Coal imports: Federal Republic of Germany

m e and source

Steaming coal Australia Canada Poland South Africa United Kingdom United States Other Total

Coking coal Australia 26 Poland - Soviet Union 5 United Kingdom 30 United States 422 Other 170 Total 653

e Estimate. Source: IEA (1989~).

Electricity utilities must purchase annually certain amounts of domestic coal, according to their coal-fired capacity. The total amount of domestic coal that must be bought is specified in the Jahrhundert contract, which was signed in 1980 and requires an increasing amount of domestic coal to be purchased by utilities, peaking at 46 Mt a year for the period 1991-95. The contract expires in 1995 (International Energy Agency 1 9 8 8 ~ ~ p. 132).

From 1980, imports were regulated also through the Tariff Quota Law of that year, which specified annual import quotas of 33 Mt for the period 1986-90 and 36 Mt for 1991-95. However, from 1988, German utilities could import one tonne of coal for each tonne of German coal that they consumed in excess of 33 Mt (International Energy Agency 1988a, p. 132). In any case, the overall import quotas are not constraining. In 1987 the electricity sector's portion of the quota was 23 Mt, but only 7.2 Mt of the quota was used. This reflects the high and increasing minimum specified purchases of domestic steaming coal, combined with stagnant electricity demand and a decline in coal's share in electricity generation.

Having purchased domestic coal at high prices compared with imported coal or fuel oil, utilities do not simply set electricity prices to cover their costs. They first claim compensation from a fund financed by a levy added to the bills of electricity consumers, this levy being set each year by the Minister for Economics following industry consultations. The coal levy (Kohlepfennig) is currently at a record 8.5 per cent. Compensation from the fund is obtained in two tiers.

In the first tier, utilities claim rebates on the purchase of the first 23.7 Mt of domestic steaming coal, calculated with reference to the price of imported fuel oil, not coal. This system was established when, on a heat equivalent basis, oil was more expensive than coal; payments in this tier were then negligible. Since 1986, as oil prices have fallen, this situation has reversed dramatically. As the gap between fuel oil and domestic coal prices has widened, calls on the fund have increased, and as a result the fund now has a deficit of over DM4b.

To reduce the claims on the fund, the government artificially raised the price of oil by raising the tax on heavy fuel oil to power stations from DM15/t to DM55/t.


0 Elextricity prices in Europe: 1981

ABARE chart

Belgium France Greece Italy Portugal Denmark Germany Ireland Neth. UK

Such intervention, which undoubtedly distorts the choice of energy source, is consistent with Germany's policy of limiting dependence on oil.

In consequence of this reduction of claimable compensation, utilities must recover part of their costs through increased charges to electricity users. As a form of assistance to the coal industry, general electricity charges are less trans- parent than the Kohlepfennig. It thus becomes increasingly difficult for consumers to identify how much of their inflated tariff is due to the operation of domestic coal policy. In the second tier, utilities claim rebates

from the same fund for the balance of their purchases of domestic coal above the first 23.7 Mt, based in this case on the difference between the actual price paid for domestic coal in each year and the price of imported coal in 1980, adjusted for inland transport costs.

These rebates only partially recover the difference between the prices of domestic and imported coal. The rest of the difference is passed on to electricity consumers through increased electricity tariffs (IEA 1988a, p. 132). Electricity tariffs in Germany are already among the highest in Europe (figure Q). Increasingly stringent pollution controls have also contributed to rising costs.

The International Energy Agency (1988a) has expressed the various forms of

assistance to coal production as producer subsidy equivalents. The Agency estimated that effective subsidies on sales of coal to public electricity and combined heat and power stations amounted to nearly DM6.5b (US$3.6b) in 1987 (table 33). This constitutes the largest single form of assistance to the German coal industry, accounting for more than half of total measured assistance to the industry.

Coking coal The German steel industry has been liberalised considerably in recent years, and with the prospect of complete liberalisation in the near future is unable to bear the burden of higher input costs and still maintain competitiveness. The basis of coking coal support is a taxpayer subsidy, delivered through the Hu ttenvertrag between the major steel makers and Ruhrkohle (and similar contracts with smaller producers) which is due to expire in 2000 following an extension in 1985. Under these contracts, German steel makers must buy their coking coal domestically at prices close to the price they would have had to pay for imported coking coal. Most of the difference between this price and the production cost of domestic coking coal is paid to coal producers by the federal and state governments.

Assistance directed specifically to coking coal has increased dramatically in recent years, reaching DM3.5b in 1987 (see table 33) and DM3.78b in 1988 (on 26.4 Mt of coking coal). In addition to the actual subsidy paid in 1988 (DM143.15/t), small contributions were paid by the steel industry (DM4.5/t) and some of the loss was borne by the coal industry itself (DM8.5/t) (Financial Times Business Information Ltd 1988~). Exports of coking coal are also subsidised, but export subsidies are due to be phased out by 1992.

In the 1988 negotiation of the Huttenvertrag, a ceiling of DM10.9b was applied to the total subsidy provided over the three years beginning in 1989.

Overall The two main instruments of coal assistance, based on the Jahrhundert and


Huffenverfrag contracts, accounted for 95 some other coal exporting countries are per cent of assistance to the coal industry in seeking to have reduced coal protection 1987. The current policy for steaming coal form part of the outcomes of the current affects users of both coal and electricity. For GATT negotiations. coking coal, assistance is provided largely In addition, as discussed above, the EC through consolidated revenue and has little Commission is proceeding with measures effect on steel industry costs. Steaming coal to establish a more integrated and free policies are therefore likely to be more market for energy in accordance with the directly distortionary, at least in their Community's 1992 unification program. impact on related industries. As part of this process the Commission has

While there is internal political resist- approved only a temporary extension of ance to removing coal industry subsidies, German coal industry subsidies and has

I particularly from regional interests, there is required the German government to increasing pressure from outside Germany submit a plan to the Commission for , for industry restructuring. Australia and restructuring the industry. The plan, which

33 Assistance to Federal Republic of Germany coal producers

Assistance category Unit 1982 1983 1984 1985 1986 1987p

Financial aid Investment grants DMm 412.0s 150.2 1903 149.7 123.8 135.5 Special to Eschweiler Bergwerks

-Verein AG DMm 168.0 109.7s 66.4 0.0 120.0 67.0s Grants to promote innovation DMm 67.0 47.2 40.6 55.3 28.6 0.0 s Mineworkers' bonuses DMm 220.0 184.0s 183.9 184.4 184.0 184.0s Special debt claim of Ruhrkohle AG DMm 64.1 203.4 30.2 30.2 30.2 30.2 Special debt claim of Saarbewerke AG DMm 21.4 s 21.4s 21.4 21.4 21.4 21.4 Special grant to promote sales of coking coal DMm 974.5 s 810.0 1707.1 1 439.6 2 017.5 3 510.0

Special capital depreciation measures DMm 70.0 s 50.0s 32.0 30.0 30.0 30.0s Excess deficit payments to miners' pension fund DMm 0.0 0.0 0.0 509.0 nd 274.0 Adjustment for compensation to redundant miners DMm -200.0 s -200.0s -200.0 s -200.0 s -200.0 s -200.0s

Subtotal DMm 1797.0 1376.0 2072.0 2219.6 2355.5 4052.1

Price support Excess payment on sales of coal to public electridtiand combined heat and power producers DMm 2 285.0 3 680.0 4 560.0 3 530.0 5 125.0 6 560.0 Excess payment made by domestic steel producers DMm 50.0 s 50.0 s 43.0 s 66.4 38.4 28.5 s Subtotal DMm 2 335.0 s 3 730.0 s 4 603.0 s 3 596.4 5 213.4 6 588.5 s

Producer subsidy equivalent DMm 4 132.0s 5 106.0s 6 675.0s 5 816.0 7519.0 10Ml.O~ Per tonne produced DM 46.4 62.1 84.1 70.6 93.1 130.1 Per tonne produced US$ 19.10 24.30 29.50 24.00 42.90 71.10

nd No data available. p Preliminary budget estimates. s IEA Secretariat estimate. Source: IEA (1988a, P. 133).


involves a reduction in industry protection through to December 1993, is currently under review. The Commission has also

1 decided to examine whether the long term I supply contracts with power utilities, i notably the Jahrhundert contract for ' 1989-95, are compatible with the rules of ' competition of the EC Treaty.

However, in a round of ministerial-level talks during August 1989 it was agreed that use of German hard coal in electricity production should remain steady at around 41 Mt during the last five years of the Jahrhundert contract. New means to finance the compensation fund were also decided upon, so that the Kohlepfennnig levy on electricity consumers could be reduced from 8.5 per cent to 4.5 per cent.

Base case and scenario assumptions Base case As some coking coal produced in Germany is used for steaming coal purposes the IEA statistics reporting German hard coal production (IEA 1989) have been reworked in terms of end use. On this basis German production in 1988 of steaming coal is estimated at 44.3 Mtce, and of coking coal at 29 Mtce. On the basis of German government expectations reported through the IEA (1989), production of steaming coal (in the above sense) is projected to decline only slightly by 1995, to 42.7 Mtce, but then to decline substantially to 35 Mtce by 2000.

Coking coal production is projected to fall gradually from the 1988 level of 29 Mtce to 22.5 Mtce by 2000, reflecting declining government support (IEA 1989~).

The assumed demand for hard coal is consistent with an IEA projection that takes account of an expected 14 per cent increase in lignite production to 2000, restricting growth in hard coal demand.

Overall, the IEA derived base case implies some reform of protectionist policies is expected during the 1 9 9 0 ~ ~ but that reform is likely to fall well short of total deregulation by the year 2000. Current support arrangements (the Jahrhundert

and Huttenvertrag) would be extended beyond their present life to at least 2000.

Scenario 1 Exposing the German industry fully to international competition by 2000 would, it appears, result in large declines in indigenous production. To achieve this goal, the Jahrhundert contract for steaming coal and the Huttenvertrag for coking coal would need to be phased out completely over the short term. Estimates in the literature (for example, Coaltrans 1988) suggest that only around 20 per cent of 1988 hard coal production would have been competitive at world prices. By applying this factor in scenario 2, production of hard coal in 2000 is assumed to fall to only 15 Mtce, of which 10 Mtce is assumed to be steaming coal.

Scenario 2 This scenario allows for a more rapid fall- off in the volume of steaming coal for electricity generation under the Jahrhundert contract compared with the base case, but less than that assumed under scenario 1.

Whereas present government policy is committed to maintaining use of indigenous steaming coal in power stations at around 41 Mt to 1995, in this scenario the quantity of coal is assumed to be lowered gradually to around 33 Mt by 1995. Further rationalisation of the industry is assumed to 2000, after the present Jahrhundert contract expires in 1995, with production of steaming coal projected to fall to 25 Mtce. Such a level of steaming coal production would be consistent with a moderate pace of policy reform.

Coking coal production is also projected to decline as the protectionist policies are reformed, reflecting the fact that much of Germany's coking coal production is used in steaming applications. Also, as subsidies paid to steelmakers under the Hutten- vertrag are lowered, although more slowly than implied in scenario 1, coking coal production will fall. In this scenario coking coal production is assumed to fall to 18 Mtce in 1995 and 10 Mtce in 2000 to be consistent with reductions assumed for steaming coal.

Cwl protection tefonn

A.4 Spain Over recent years coal has increasingly replaced oil for power generation, and

Present Spanish policies in support of the power stations now account for 82 per cent indigenous coal industry are expected, of total coal consumption. Consumption in

I despite their high cost, to lead to increasing the steel industry hascontinued to fall since

I local production of hard coal during the 1981 and now accounts for only 9 per cent 1990s. An appreciable reduction in of coal consumption. The cement industry, protection to the Spanish industry could which imports all its coal requirements, lead to falls in domestic production of accounted for 5 per cent of the total (US

I around 8 Mt, which is half the production Department of Commerce 1989). I recorded in 1988. There are five major mining companies

operating in Spain, of which two are state I

1 Overview of the domestic owned. The largest, ENDESA, is a state-

I coal industry owned electricity utility, and accounts for approximately 37 per cent of total Spanish

I Spain produces all grades of hard coal, but coal production. All of ENDESA's coal goes over 90 per cent of production is steaming to its coal-fired power stations, and it also coal. Total annual output of hard coal makes substantial coal purchases from between 1983 and 1988 has been around 11 domestic and foreign sources. Mtce (14 Mt). (This figure does not include 5-7 Mt of black lignite, a low ranked coal which is mined by surface methods and is Coal trade competitive with imports. Lignite Imported coal supplements domestic producers do not receive financial supplies in the Spanish electric utility assistance from the national government.) industry and provides the bulk of coal Most of the hard coal is produced from consumed in other industries. In 1988, hard relatively highcost underground mines coal imports totalled 8.8 Mt: 5.1 Mt of (IEA 1988a). steaming coal and 3.6 Mt of coking coal.

34 Cod imports: Spain

me and source

Steaming coal Australia Canada Colombia Poland South Africa United States Other Total

Coking coal Australia 562 587 576 1065 9% 986 898 879 Germany FR 31 - 21 131 - - - - Poland 426 61 5 838 781 637 291 447 251 United Kingdom 70 - 3 3 - - - - United States 2 765 2 431 1 689 1388 2 401 1 820 2092 2513 Other - - - 60 56 - - - Total 3854 3633 3127 3428 4090 3097 3 437 3643

e Estimate. Source: IEA (1989~1.

52 Disclrssion paper 90.1

Metallurgical coal imports have remained relatively stable over recent years at 3 4 Mtce a year, while steaming coal imports have increased from around 2-3 Mtce a ' year in the period 1981-84 to around 4-5 Mtce in recent years. The United States is the largest supplier of coking coal (70 per cent in 1988) and South Africa of steaming coal (around 85 per cent). Australia exports only minor quantities of steaming and coking coal to Spain. A summary of volumes and sources of coal imports over recent years is provided in table 34.

Industry assistance Current coal policy in Spain is described by IEA (1988a) and US Department of Commerce (1989). The main forms of assistance are direct operating grants and price support through the assured sale of domestic coal to the electricity industry. Most of the direct financial assistance budgeted in recent years has been for grants to cover operating losses of underground mines in the Central Asturian basin. In 1987 the government provided aid of this type totalling Ptas37.lb (US$300m) (see table 35).

--

35 Assistance to Spanish coal producers a

Assistance category Unit 1987~

Financial aid Investment grants Ptam 405 Grants to promote innovation pta m 150 Aid to cover operating losses pta m 37 117

Excess deficit payments on social charges Ptam 526 Subtotal ptam 18 198

Price support Excess payment on purchases of steam coal by public electriaty producers pta m 8 400

Producer subsidy equivalent pta m 46 590 Per tonne produced pta 2415 Per tonne produced pta 19.20

a Data not available for years prior to 1987. p Projected. Sarrcc: IEA (1988a, p. 153).

In addition, some hard-coal producers receive grants (totalling Ptas405m or US$3.3m in 1987) to help finance investments in mines, including geological research, pollution control programs, infrastructure improvements, market studies and mining safety. Such grants may cover up to 20 per cent of investments. There are also (not shown in the table) 'soft loansf which may contribute up to 70 per cent of total investment (US Department of Commerce 1989 p. 119).

Price supporting measures are more complex. The prices for open-cast coal and waste coal are unregulated. Coastal and 'insular' power plants (those without adequate transportation from domestic coal fields) and those needing an admixture of higher quality coal for environmental reasons, can obtain imported coal duty-free within a quota agreed each year by the Ministry of Industry and Energy. The imports of steaming coal for cement works and other industrial users are likewise administered under a duty-free quota system.

Under a new agreement, the electric utilities give a preference to indigenous coal before resorting to imported coal, with the exception of the power plants located on the coast, which are supplied with imported coal.

In December 1986 a new contract system was agreed upon between the coal producing companies (CARBUNION) and the association of electric utilities (UNESA). It provides for the underground coal to be sold first before taking open-cast coal. Every year a 'reference price' for underground coal (the minimum price paid by the utilities) is adjusted according to a formula which will trend it gradually to the average price of coal sold by the most important of the European Coal and Steel Community coal producers (those of the United Kingd~m, Germany France and Belgium) to their respective electric generating utilities. When a given coal company's average production costs are above the reference price, the utilities may be required to make up the difference by a supplementary payment - 'especially if, in the view of the Spanish authorities, such a payment would help the coal company

Con1 protection reform 53

develop a profitable economic and tech- nical strategy or a programmed closure' OEA1988a). To finance compensation to the utilities for these supplementary payments, the Electricity Compensation Agency charges a levy on electricity tariffs (presently 2.5 per cent). In 1987, proceeds from this levy were expected to reach Ptas8.4 b ($68m).

The reference price, as well as the supplementary payments, is a form of price support, since in certain cases it leads to prices being paid that are higher than those for imported coal. However, because information is not available on coal prices paid by Spanish electric utilities, only the supplementary price payments are shown in table 35. These represent, therefore, the minimum amount of expected price support for 1987 as estimated by the IEA (198%).

Indigenous coal for steelmaking is priced in line with imported coal excluding any import duty. The import duty (14 per cent of the value) is applicable only above an annual threshold volume, which in fact has never yet been reached.

Future policy directions and implications for imports The basis of Spanish energy policy is the National Energy Plan. The policy is directed toward rationalising energy consumption, reducing energy imports and bringing energy capacity into line with demand projections.

The government is trying to improve the competitiveness of the coal mining sector by reducing costs through modernisation and rationalisation of extraction. Productivity has already increased by 17 per cent between 1983 and 1986 IEA (198%). Further rationalisation of deep underground mines is necessary, but industry support remains high and no reduction in support has yet been determined.

No changes in official coal policy have been announced since 1988, and the IEA (1989a) forecasts that after a short term drop in hard coal production to around 8.4 Mtce (11 Mt) in 1990, output will grow to around 19 Mtce (25 Mt) in 2000.

54

Even if domestic production increases in line with IEA projections, demand for imported steaming coal is also likely to grow. According to IEA figures, Spain has approximately 5500 MW of hard-coal-fired power generating capacity, with a further 2200 MW due to come on line before 1995. An increase in imported coal usage is also likely to be needed to deal with air pollution problems caused by burning high-sulphur local lignite. The IEA forecasts steaming coal import demand to increase from 4.7 Mtce in 1987 to 8.4 Mtce in 2000.

Spain's entry into the European Community is likely to slow any expansion in steel production to fit in with European Coal and Steel Community plans for restructuring the European steel industry. At the same time increased electric-arc furnace capacity is likely to displace some blast furnace production. The TEA (1989a) predicts negligible coking coal production after 1989, and that imports will remain steady at around 3.6 Mtce until 2000.

Base case and scenario assumptions Base case The IEA (1989a) projects that use of coal as a primary energy source will increase from 16.9 Mtce in 1988 to 31.2 Mtce by 2000, this increase being mainly in electricity generation. Under current policy conditions hard coal production in Spain is projected to increase from 11.1 Mt in 1988 to 19.1 Mt in 2000.

In 1988 coking coal production was very small (0.9 Mt). In line with current IEA forecasts, coking coal production is assumed to be negligible from 1989 onward.

Scenario 1 A move to a free market for coal in Spain would almost certainly lead to a contraction of coaI production. The proportion of the hard coal industry that would be competitive in a free market environment is uncertain, but it has been estimated by the EC Commission that Spanish production could be cut by about 8 Mt if the


industry were deregulated (personal communication, C. Cleutinx, Head of Coal Policy Division, EC Commission, September 1989). This estimate was based on a world price of 88-90 ECU/t, regarded by the EC Commission as sustainable in the long term on the basis of Australian and US production costs.

Applying a conversion factor of 1.3 tce/ t for Spanish coal, 8 Mt is 6.2 Mtce. If the latter figure is taken to include the above- mentioned cessation of coking coal production by 1992, steaming coal production can be assumed to fall to 5 Mtce in 2000.

Important support policies which would need to be withdrawn include the price and guaranteed supply arrangements for domestic coal supplied to the Spanish electricity industry, and the provision of direct grants to underground mines by the Spanish government. The EC Commission late in 1989 called for the presentation of a plan by the Spanish government by June 1990 to eliminate aid to the coal mining industry. The coal mining industry must also submit a plan for restructuring and modernisation.

Scenario 2 Even without moving to complete free market conditions, a commitment to coal industry restructuring in Spain could well lead to a stabilising of domestic coal production, with an associated increase in demand for imported coal. For scenario 2 it was assumed that policy change would result in steaming coal production in Spain stabilising at the 1988 level of 10.2 Mt. This scenario would accord with a more conser- vativeapproach to withdrawing support to the Spanish coal industry during the 1990s than implied in Scenario 1.

Under this scenario the increased demand for coal forecast by the IEA is met from imports rather than from growing domestic supply.

A.5 France France has been steadily rationalising its coal industry during the 1980s, and production has declined in recent years to 12 Mt in 1988. Imports of coal (which are

not restricted) have fallen even more rapidly; by 55 per cent in the same period. A strong commitment to nuclear-powered electricity generation, and rationalisation of the small state-owned steel making industry, account for the declining demand for coal. Further rationalisation of the indigenous coal mining industry is planned for the 1990s. However, since demand for coal in the electricity sector is unlikely to grow substantially during the 1990s, there is little scope for growth in imports.

Overview of the domestic coal industry France presently has a small coal industry compared with the United Kingdom and the Federal Republic of Germany. In 1988, it produced around 10.5 Mt of steaming coal and 1.5 Mt of coking coal. Less than half of France's coal requirements, in volume terms, are supplied domestically.

Hard coal production capacity in France is primarily owned by a single state-run company, Charbonnages de France (CdF), which also generates electricity at pit-head power stations. Most direct budgetary aid to current production takes the form of grants to cover operating losses of CdF. The company's returns from coal and electricity sales are closely linked to the price of imported coal. However, high average mining costs mean that CdF has not covered its operating costs. In 1987, CdF was paid a total subsidy of FF2960m or around FF246/t (US$59.40/t), while carrying debt of FF14.lb. The justification for such subsidies appears to be to allow the graduation of pit closures, which are inevitable as part of the continued rationalisation of the French coal industry.

Since 1960, total French hard coal production has steadily declined from 56 Mt to 12 Mt in 1988. Since 1980, production has declined by around one-third (see figure R), directly reflecting rationalisation by the French government. At the same time, total domestic consumption of coal has been declining, with imports falling from 30 Mt in 1980 to 14 Mt in 1988.

Steaming coal is used largely for electricity generation. In recent years, CdF


36 Coal imports: France

'Qpe and source

Steaming coal Australia Germany, FR Poland South Africa United Kingdom United States Other Total

Coking coal Australia Canada Germany, FR Poland South Africa United States Other Total

e Estimate. Source: IEA (1989~)

has supplied only around 2 Mt per year of steaming coal directly to the state power company, Electricit6 de France (EdF). About half the steaming coal produced (about 5.1 Mt) is used at CdF's own pit-head power stations, from which electricity is sold to EdF. Of the remaining 4.7 Mt of steaming coal, 3.0-3.5 Mt is sold to industry and exports have accounted for around 1-1.5 Mt. EdF also imports coal for its own power stations - around 1.7 Mt in 1987 - and the French cement industry imported around 1 Mt of coal in 1987.

French reliance on coal-fired electricity has steadily declined, with a consequent decline in demand for steaming coal. In 1960, coal accounted for 46 per cent of all energy inputs into electricity generation.

I By 1970, this figure had fallen to 35 per cent due to increased use of crude oil. Nuclear power stations commenced operation during the 1970s, and by 1980 accounted for 24 per cent of energy inputs to electricity generation, with coal at 29 per cent. Coal now accounts for only 8.5 per cent, and nuclear power for 70 per cent, of electricity generation. In absolute terms, annual coal

use in electricity generation has fallen from 24.4 Mtce in 1980 to 10.5 Mtce in 1987.

The small volume of coking coal produced in France is used in the domestic steelmaking industry. It is insufficient for domestic requirements, and imports of around 7-8 Mt have been necessary over recent years. - R French hard coal production

ABARE chart


The French steelmaking industry produced around 17.7 Mt of steel in 1987. The industry was restructured during 1987 with the merging of the two state-run steel makers. Around 10 Mt of coking coal was used by the steel industry in 1987, of which 8 Mt was imported.

Coal trade Imports of hard coal by France have fallen from 27.5 Mt in 1981 to an estimated 12.1 Mt in 1988 (table 36). The decline has been almost entirely in steaming coal imports. Over the 1981-88 period, steaming coal imports have fallen by 77 per cent (13.3 Mt) while coking coal imports have changed little since 1982.

Imports from Australia in 1988 amounted to 2.5 Mt of coking coal and 0.8 Mt of steaming coal. Other major suppliers of coking coal include the United States (3.8 Mt) and Germany (1 .I Mt). With the rapid decline in steaming coal imports, South African and US steaming coal imports into France have fallen markedly since 1980. In 1988, South Africa and Australia were the largest suppliers of steaming coal, accounting for 22 and 20 per cent respectively. France also exports small quantities of coal, amounting to 1.5 Mt in 1988. Most is exported to the Netherlands and to Germany.

Policy develo ments and P implications or imports Steaming coal French policies on the domestic use and import of steaming coal centre around the relationship between CdF, the state-owned domestic coal producing body, and EdF, the national electricity authority. Agreements between these bodies guarantee sales of steaming coal and of electricity generated by CdF. Edf purchases of coal and electricity from CdF are given in table 37.

The original agreement for the five years 1984 to 1988 was aimed at reducing coal production from 17 Mt to around 12 Mt, to allow CdF to return to a breakeven financial situation and eliminate the need for a direct production subsidy. However,

under these arrangements CdF accrued a large debt because of required takeovers of loss-making companies, and from reorganisation and development costs. In 1984 CdF received a subsidy of FF7.0b1 and the government planned to hold the subsidy at that level to 1988, forcing the elimination of non-productive mining operations. In 1987, the French Ministry of Industry provided aid of FF2.86b to cover operating losses plus an additional FF3.6b to cover the cost of mine closures. In 1988, the EC Commission approved assistance of FF1.66b to cover 51 per cent of anticipated operating losses of CdF and to finance the closure of unprofitable mines.

The 1984 agreement specified the quantities of coal and electricity that EdF must buy from CdF from 1984 to 1988, and the price at which these quantities are to be traded. The contract provided for EdF to take all the steaming coal and electricity that CdF could supply. EdF paid a surcharge of 10 per cent over the cost of imported coal delivered to the Paris region. With respect to electricity purchases, EdF paid for the first 7TWh per year at a flat rate which decreased from FF4000m in 1984 to FF2000m in 1988. Additional deliveries were paid on the basis of the price of imported coal plus 10 per cent, assuming a consumption of 2400 kcal/kWh, plus the fixed costs observed in the EdF power stations. The formula is thus based on the cost of imported coal and the cost of nuclear electricity.

Another aspect of the 1984 agreement was that EdF was to offer over 1000 jobs a

37 Coal and electricity purchases by EdF from CdF

Calendar year Coal Electricity Mt TWh

Sourcc: Financial Ties (1988b).

~ o a l protection reform 57

year to ex-CdF employees, in recognition of the substantial impact of the agreement on employment in the French coal industry. Fifteen thousand jobs were expected to be lost by 1988, out of the 1984 workforce of 57000. In fact, CdFemployment in 1987 was only 33 500.

Under an agreement reached early in 1988 for the years 1989-93, coal sales are to

1 fall from 2.3 Mt in 1989 to 1.8 Mt in 1993 and electricity sales to decline from 7.9 TWh to 5.97 TWh. Overall, sales over this five-year period will amount to around half of those provided for in the 1984 agreement. EdF will continue to use the coal pricing and electricity pricing formulas of the 1984 agreement, but with the coal prices determined on an ex-mine basis rather than as delivered to the Paris region. There is no longer a commitment concerning the employment of ex-CdF employees.

The French government sees this latest agreement as rationalising coal production so as to concentrate it in mines with the best prospects and the greatest productivity. Mining in the Nord and Pas-de-Calais coal fields and the underground mines of Centre Midi should soon cease, and some rationalisation should occur in the Lorraine coal fields. It is expected that at the begnning of the 1990s annual production will be down to 10 Mt and employment to 15 000 (Commission of the European Communities 1988a).

In general, French government support to the coal industry, although aimed at rationalising the industry, has allowed domestic producers to obtain a price higher than the price of comparable imported coal. The average production cost in 1987 has been reported to be FF557/t (around US$92.80/t), whereas the average imported price was FF270/t (around A$45/t). Clearly, much of France's production would not be viable without the subsidy paid to CdF to cover operating losses.

Efforts to rationalise the French coal industry are showing success, as evidenced by the declining production since 1984, falling average production costs and rising productivity. French production costs fell by 17 per cent between 1985 and 1987 (Commission of European Communities

58

1988~). Overall, there are likely to be few if any impediments to continued rationalisation of the French hard coal industry. Under the present rationalisation program, France's production of coal is likely to fall during the 1990s, to around 8 Mt by 1995 and to 5 Mt by the year 2000.

Expansion of the use of coal in the power sector is likely to be constrained in the 1990s, as commitments to increased nuclear power capacity have already been made. France is seeking to expand export markets following its build-up in electricity generation capacity using nuclear fuel. EdF is likely to require some coal-fired capacity because of the inefficiencies in operating nuclear stations during periods of peak demand. However, if France exports large volumes of electricity to other European countries after 1992, coal could be required to replace nuclear power in meeting mid-load demand for electricity. EdF projections point to exports of around 45-50 TWh by 1995.

Clearly, CdF will be rationalised to retain only the most productive low- cost mines, and EdF will have only minimal coal requirements. The removal of assistance therefore would have little effect in terms of allowing increased imports into an already small French trade.

Coking coal The 2 Mt of domestic coking coal is sold at subsidised prices in competition with coking coal imported at world prices. Any losses made on coking coal sales to the steel maker contribute to the operating losses of CdF for which grants are made by the French government. For the small quantities of domestic coking coal used by the small state-owned steel industry, policies directly concerning the level of support to the steel industry are important.

Future demand for imported cokingcoal into France will be directly related to the government's restructuring policy for its state-run steel maker. As France produces only around 2 Mt of coking coal, reduction in assistance to the domestic coal industry can have only a small effect on the level of coking coal imports.


Base case and scenario assumptions The French government is rationalising the coal industry by reducing the quantities of coal and electricity that EdF must purchase from Cdf. The expectation is that, at the beginning of the 1990s, total annual production will be down to 10 Mt (Commission of the European Communities 1988~). Over the longer term, announced rationalisation plans are expected to result in steaming coal production falling to 2.1 Mt by 2000, and coking coal production to 1.9 Mt by 2000 as projected by the IEA (1989~).

Under scenario 1 government assistance is assumed to be completely removed, and steaming coal production to cease, by 1995. This scenario therefore assumes the bringing forward of the likely cessation date of steaming coal mining in France, primarily in northern regions bordering Belgium. This would be achieved if the supply agreement between CdF and EdF was not renewed when the provisions of the current agreement expire in 1993, and if subsidies granted to CdF to cover operating losses were discontinued. How- ever, primarily coking coal production of the Lorraine and Southern coal fields, is projected to continue as in the base case.

Under scenario 2, steaming coal production is assumed to fall at an intermediate rate, and to cease by 2000, some five years later than assumed in scenario 1. This would be achieved if the French government hastened its present rationalisation program for highcost mines, and lowered the level of coal and electricity sales under any new CdF-EdF supply agreement, implemented in 1993, which would apply to 2000.

A.6 Belgium Belgium is a small, high-cost producer of hard coal. Production has steadily declined from around 22 Mt in 1960 to an estimated 2.6 Mt in 1988. The Belgian government is implementing an industry rationalisation plan (the Gheyselinck plan) which calls for the cessation of domestic coal production by 1996. Three mines were closed under

this plan in late 1987 and early 1988 leaving only two in production. The government is attempting to close the remaining mines by 1992, but has met strong resistance from miners.

Overview of the domestic coal industry Coal supplied around 20 per cent of Belgium's total primary energy requirements in 1987; oil accounted for the bulk of the remainder. Domestic coal production satisfied only around 20 per cent of total coal requirements, with imports of around 9 Mt.

Coal production in Belgium is high-cost due to the unfavourable geological conditions in its coal fields. Costs have ranged between US$116/t and US$124/ t during 1985-87 (Commission of the European Communities 1988). All coal production is from underground mines, and all of Belgium's coal mines are run by Kempense Steenkoolmijnen (KS) in which the Belgian government now has 77 per cent ownership. Financial support for coal production by federal and provincial governments has been high. IEA estimates show Belgium to have had the highest per-unit level of subsidy of all European IEA members in 1986 and 1987. Most direct budgetary aid takes the form of deficit grants and support for coking coal sales. Given the commitment of the Belgian government to ceasing domestic coal production, the level of coal imports will depend critically on demand trends in the domestic power and steel industries.

Steaming coal has accounted for around 55 per cent of hard coal production since 1985 and is used mostly in electricity generation. Since 1984 KS has supplied about 2-3 Mt a year of steaming coal to the power utilities through their purchasing agency, l?ool.de Calories.

Domestic coal production has provided a decreasing proportion of domestic consumption: 44 per cent in 1980, and around 36 per cent in 1987. Electricity generation accounts for most of Belgium's steaming coal consumption. The Belgian power system has been steadily moving toward greater reliance on nuclear power


during the 1980s, limiting its demand for rising to around 1 Mt (15 per cent) in 1988. coal to 4-6.5 Mt a year. A significant part of Belgium's coking coal

Domestic coking coal production has imports are from Germany. met about 40 twr cent of the reauirements of Belgium's &eel industry in re'cent years. In 1987, the steel industry consumed around 7.2 Mt of coking coal, of which 4.9 Mt was imported. Steel production was around 9.8 Mt in 1987, compared with a capacity of 12.4 Mt.

Coal trade Imports of hard coal by Belgium have varied between 7.5 and 11 Mt since 1981 (see table 38). Steaming coal imports have remained close to 4.4 Mt since 1983. South Africa is the major source of steaming coal imports (55 per cent in 1988). Over the past three years, South Africa has accounted for an average of 50 per cent of steaming coal imports.

Imports of coking coal have varied between 3.1 Mt and 6.8 Mt since 1981. The high volume of coking coal imports during 1988 reflects lower domestic production. Imports of coking coal have been dominated by the United States (64 per cent in 1988). Australia has been a minor supplier, accounting for 270 kt in 1987,

Policy develo ments and implications P or imports Government assistance to the domestic coal industry is afforded through long term supply agreements guaranteeing sales of domestic coal to the electricity and steel industries, and direct grants to KS.

For steaming coal, price and production support have been guaranteed by long term agreements between KS and Pool de Calories, negotiated under the authority o: the Ministry of Economic Affairs. An agreement for the period 1984 to 1987 called for sales of 2.1 Mt of steaming coal annually to the domestic power utilities. Actual sales have been above this contracted level, reaching 3.1 Mt in 1985.

Prior to 1986, prices for domestic coal were some 25-30 per cent above the price of imported coal. Since that year, domestic coal supplied to the Pool de Calories has been priced the same as delivered imports. This change in the pricing of steaming coal, and falls in the price of imported coal, have resulted in an increase in government aid

38 Coal imports: Belgium

w e and source 1981 1982 1983 1984 1985 1986 1987 1988e kt kt kt kt kt kt kt kt

Coking coal Australia 311 257 127 141 16 3 272 1001 Germany, FR 1000 43 1 lU72 1 244 1 028 595 704 936 Poland 181 337 194 514 540 320 472 512 United Kingdom 171 186 101 21 - - - - United States 2 504 3 094 1 557 2 659 2 951 3 050 3405 4368 Other 48 98 97 399 128 73 21 22 Total 4 215 4 403 3 148 4 978 4 663 4 041 4 874 6 839 Steaming coal Australia 231 231 220 236 205 1 46 241 106 China - 82 55 % 112 1 66 92 144 Germany FR 1283 1151 1110 1106 1 067 1 025 808 647 South Africa 2 769 2 989 1 896 1 847 2 078 2 133 2370 2332 United States 1 018 1360 749 612 671 671 454 601 Other 535 268 332 443 524 339 294 396 Total 5 836 6 081 4 362 4340 4657 4 480 4259 4226

e Estimate. Source: IEA (1989~).


39 Assistance to Belgian coal producers

Assistance category Unit 1982 1983 1984 1985 1986 19871,

Financial aid Investment aid BFm 510 567 593 588 630 0 Aid to maintain a qualified workforce BFm 13 e 12 16 15 12 10

Aid to maintain surplus producers' stocks BFm 0 146 106 0 0 0 Aid to promote sales of coal and coke BFm 3324e 1 530 3 794 4 390 6527 6950 Defiat grant to help cover operating losses BFm 3467e 4518 4 665 4 7% 5 849 8 629

Grants to supplement miners' holiday and sickness benefits BFm 476 533 561 544 550e 500e

Subtotal BFm 7808 7 311 9735 10333 13568 13518

Price Support Excess payment by public electricity producers for domestically produced coal BFm nd nd nd 956 e - -

Producer subsidy equivalent (excluding price support) BFm 7808e 7306 9735 10333 13568e 16089e Per tonne produced BF 1 195 1 200 1 545 1660 2 430 3 650 Per tonne produced US$ 26.10 23.40 26.75 28.00 54.30 96.25

to cover the gap between production costs and returns to KS.

Sales of coking coal are likewise guaranteed by supply contracts between the Belgian steel sector and KS. The Belgian steel industry agreed to purchase 3.0-3.1 Mt annually up to 1986, but the figure was lowered to 2.6 Mt for 1986. The contract was extended, at reduced quantities, for 1987 (2.1 Mt) and 1988 (0.5 Mt). The price of coking coal supplied to the steel sector has been set close to imported coking coal prices (meaning, in this case, the indicative prices published by the EC Commission). As for steaming coal, the difference between production costs and world prices is made up by the government. For 1988, aid of BFOdlb (US$lh7m), covering 93 per cent of anticipated operating losses on 2.3 Mt of coal, was approved by the EC Commission. Since 1980, the government has viewed these budgetary grants to KS as

acquisition of equity, and its equity share has risen from 70 per cent in 1980 to 77 per cent in 1988.

Assistance to the Belgian coal industry is also afforded through 'aid to maintain a qualified workforce' (US Department of Commerce 1989, p. 471, investment aid, and research and development assistance. The overall level of assistance has also been quantified by the IEA in terms of producer subsidy equivalents - see table 39.

The supply agreements between the coal and electricity and steel industries, as well as the price supports and other financial assistance provided by the government, have limited coal imports. Also, prices paid above world import levels by the power and steel industries have been passed on to domestic consumers of electricity and steel. Belgium's electricity prices to households are the highest in Europe.

&I protection *eform 61

The coal industry rationalisation plan, Overview of the domestic and more recent efforts of the Belgian government to bring forward the closing coal industry date of the remaining two mines, could Japan's major coal producing regions are result in domestic production of coal located in the northern island of Hokkaido

I

ceasing by the mid-1990s. Future import and the southern island of Kyushu. The demand for coal will therefore be directly industry is privately owned and employed related to trends in the overall level of 12 600 people in 1986 (IEA 19884. Mining demand for coal as a primary energy is underground, generally from thin

I

source. faulted seams, making production I exmnsive. Indigenous coal ~roduction is

Base case and scenario assumptions Base case The IEA projects that demand for coal as a primary energy source will increase from 12.1 Mtce in 1988 to 16.1 Mtce by 2000, reflecting increased use of coal in both electricity generation and coking applications. Total coal production in Belgium is projected by the IEA to remain constant at 2.8 Mtce during the 1990s. This is despite the likely implementation of the industry restructuring plan. However the IEA pro- pctions for both demand and supply were used to remain consistent with the basis for deriving the base case assumptions across all country studies.

Scenarios 1 and 2 The alternative scenarios differ from the above only in the timing of the closing of the remaining two mines. Under scenario I, mining is assumed to cease by 1992, and under scenario 2 by 1995.

A.7 Japan Japan is the world's largest importer of hard coal and supports only a small indigenous coal industry (around 14 Mt produced in 1988). Under the current Eighth Coal Policy Plan domestic coking coal production is to cease by the end of 1991-92, and deliveries of domestic steaming coal are to be reduced to, at most, 10 Mt a year. Continued rationalisation of the steaming coal industry is likely to be part of a subsequent Ninth Coal Policy Plan.

consumed whofiy within ~ a i a n . Japanese coal costs three times the price of imported coal (US Department of Commerce 1989).

Between 1961-62 and 1974-75 total production fell sharply, from 55 Mt to 20 Mt. Since then production of coking coal has fallen from 10 Mt to about 1 Mt in 1988, and steaming coal production to 10-12 Mt per year. During 1989 four mines with an annual capacity of 4 Mt were expected to I close, leaving only two mines in Hokkaido (13.4 Mt capacity) and two in Kyushi (6.1 Mt capacig ( ~ S ~ e p a r t m e n t of Commerce 1989).

Coal trade Japan accounted for 27 per cent of total world hard coal trade in 1988. In that year Japan imported 71.1 Mt of coking coal (table 40), principally from Australia (41 per cent), Canada (26 per cent) and the United States (18 per cent), and 30.1 Mt of steaming coal, principally from Australia (67 per cent), China (9 per cent), South Africa (7 per cent) and the Soviet Union (7 per cent) (IEA 1989~).

Policy develo ments and implications P or imports Assistance to the domestic coal industry is significant, being among the highest in IEA member countries on a producer subsidy equivalent per tonne basis. In 1987 assistance was estimated by the IEA at Y13 900 (US$96) per tonne of coal sold (IEA 1988~).

Assistance to the Japanese coal industry (table 41) is provided by direct operating grants and price support consistent with goals set out in official plans for the industry. The most recent coal policy plan,


40 Coal imports: Japan

%e and source 1981 kt

Steaming coal Australia 5 427 Canada 1 199 China 1 614 South Africa 1 625 Soviet Union 286 United State 2 079 Other 395 Total 12 625

Coking coal Australia Canada China South Africa Soviet Union United States Other Total

e Estimate. Sourcc IEA (1989a).

the eighth, was approved in late 1986 and covers the period 1 April 1987 to 31 March 1992. For the previous fifteen years, government policy had sought to maintain annual coal production at 20 Mt. Under the present plan the indigenous supply of coking coal from underground operations is to cease by 1991, and deliveries of steaming coal are tobe reduced to 10Mt per year, of which about 8.5 Mt will be purchased by electric power producers (IEA 1988~).

'Index pricesf for domestic coking and steaming coal are determined by the Ministry of International Trade and Industry (MITI) on the recommendation of the Coal Mining Council (composed of industry officials). In determining these prices, the Council considers the cost of coal production, the prices of imported coals and those of other competing fuels (IEA 1988a). For 1986 to 1988 the index prices were set at Y24 920/t for coking coal and #20 355/t for steaming coal. MITI maintains that these index prices serve as indicators of domestic prices that are consistent with achieving the goals of the current coal policy plan. Consequently,

actual prices paid by consumers of coal can differ from the referenced prices depending on consumers' willingness and ability to adhere to the MITI guidelines (US Department of Commerce 1989, p.90).

The IEA (1988a) has estimated that in 1987-88 these arrangements provided assistance to domestic steaming coal producers worth Y141.2b, and to producers of coking coal, Y25.7b.

Direct grants to the mining industry are provided for the modernisation and safety of pits and 'to stabilise the coal mining companies' accounts' (IEA 198&, p.148). These and other direct grants are paid out of a special account financed by duties on imported crude oil and fuel oil. In 1987-88 direct grants accounted for only about 13 per cent of assistance.

In addition to the direct financial aid listed in table 41, rationalisation of the industry is supported by the New Energy Development Organisation (NEDO) which is a quasi-government agency established in 1980. NEDO's 1987-88 budget allocated Y200b for this purpose (Japan Petroleum and Energy Trends 1989). Funds were allocated (with a M120b ceiling) for loans to


private coal storage companies to help buy, store and sell domestic coal in order to stabilise domestic coal stocks and (with a Y37b ceiling) for six-month interest-free loans for various coal industry programs (US Department of Commerce 1989).

As well as providing budgetary aid both directly and indirectly through NEDO, the Japanese government operates a system of import quotas for coal. These quotas are allocated on a half-yearly basis to final consumers and are set to equal their expected import requirements (taking into account deliveries of domestic coal). Although there is no formal requirement that importers purchase domestic coal before obtaining an import licence some domestic consumers, including electric utilities, have reportedly agreed to buy domestic coal as part of arrangements covering government support for power plant construction (US Department of Commerce 1989). Coals with qualities not found in Japan are not subject to quotas.

For steaming coal, the principal effect of assistance to the coal industry is to raise the cost of the coal to Japanese industry. As

domestic sources supply about onequarter of demand, at a cost about three times the price of imports, these costs to industry are significant. In recognition of these costs the Japanese government is taking steps to phase out domestic coal production, notwithstanding the fact that the coal industry is locally a major source of employment. Much of the financial assistance provided to the industry is designed to achieve a gradual reduction in its size and to mitigate the economic impact on coal producing regions.

Under the Eighth Coal Policy Plan, purchases of domestic coking coal will cease by the end of 1991-92. Meanwhile, the amounts to be taken by the steel industry in each year will be decided by negotiation with the domestic coal producers. The index price for coking coal ( a 4 920/t) is to remain unchanged at its 1986-87 level throughout the period. Industrial steaming coal consumers, which purchased 1 Mt in 1986-87, are expected also to phase out their purchases of domestic coal by the end of 1991-92, thus leaving electric power producers as the

41 Assistance to Japanese coal producers a

Assistance category Unit 1982-83 1983-84 1984-85 1 9 8 M 1986-87 1987-88~

Financial aid Grants for modemisation of coal pits Yb 10.0 10.5 11.2 11.4 10.2 6.5 Grants for stabilising the coal industry MJ 8.5 8.2 8.7 8 3 7.9 11.6 Grants to safety measures MJ 6.8 7.1 7.6 7.7 7.9 5.6 Grants for paying off interest on loans Yb 0.0 0.0 0.0 0.0 0.0 2.3 Subtotal Yb 25.2 25.8 27.5 27.4 26.0 26.0

Price support On sales to electricity producers and non-ferrous industries Yb 25.2 68.7 84.1 108.7 123.6 141.2 On sales to iron and steel, coke and gas-coke producers Yb 23.2 33.8 36.1 42.0 30.4 25.7 Subtotal Yb 48.4 102.5 120.2 150.7 154.0 166.9

Roducer subsidy equivalent Yb 73.6 128.3 147.7 178.1 180.0 192.9 Per tonne produced Y 4230 7 690 8780 10830 11840 13300 Per tonne produced US$ 16.90 32.50 36.00 49.00 74.10 93.10

a Japanese fiscal year: 1 April to 31 March. p Preliminary estimate. Sacrce: IEA (198811, p. 146).


only significant purchasers of domestic small amount of domestic mining coal after that period (IEA 1988a). remaining profitable in the more remote

locations. Production is consequently set

Base case and scenario assumptions

1 Base case Domestic coking coal production is assumed to fall to zero by 1992 in the base case in line with the projections in the Eighth Coal Policy Plan and IEA (1989~). Japanese steaming coal production is projected to fall to about 8.5 Mt by 1992 and remain at that level, in line with expectations of reduced purchases of steaming coal by industrial consumers, and following IEA (1989~).

Scenario 1 It is assumed in scenario 1, where removal of all protectionist policies is achieved by the year 2000, that production of steaming coal falls rapidly after 1992, with only a

at 2 Mt from 1995 onward. ~ o r i h i s gbal to be achieved two important policy reforms (among others) would have to be implemented: 'index prices' for domestic coal would have to be steadily set in line with the prices of imported coal and other energy sources; and direct grants would have to be withdrawn from the mining industry.

Scenario 2 In scenario 2 the rate of policy refonn is more conservative than in scenario 1. Production of steaming coal is assumed to fall gradually to 6 Mt in 1995 and to reach about 2 Mt in 2000. This scenario would accord with a more conservative approach to re-aligning 'index prices' to those of imported energy sources and to the phasing out of direct grants to the coal mining industry.

Coal protection refonn

- -

I I

d.(Bppendh B Model assumptions and validation

B.1 Demand side O In the models of seaborne steaming coal

trade and seaborne coking coal trade demand is specified in terms of million tonnes of coal equivalent per year for each of 14 demand regions: Federal Republic of Germany, France, Spain/Portugal, Italy, United Kingdom, Denmark, Belgium/ Netherlands, other European countries, Japan, Taiwan/Hong Kong, Republic of Korea, other Asian countries, the East Mediterranean and South America.

O Constant-elasticity demand functions (P = A.Qe) are specified for each of the above regions, based on demand projections derived from IEA (1989~) and ABARE(1989). A price elasticity of demand for steaming coal of -0.4 (Kolstad and Abbey 1984) was assumed for all countries. For coking coal, because of the limited substitutes available and the fact that coal represents a small input cost in the steel making process, a lower elasticity value of -0.1 was assumed for coking coal in all counties. The realised 1988 cif price for each country was paired with the quantity projection to complete the specification. Details of the demand functions are given in tables 7 and 20 of the text.

O It is assumed that, over the projection period, importers will continue to avoid relying on a single supplying country. The maximum shares that the importing regions will take from one supply region are assumed constant over all periods, and are given in table 42. These factors are based on the historically observed shares given in

I table 6 of the text and supplementary analysis for individual countries. Those European countries presently

66

importing only small quantities of coal are assumed, as their imports increase, to develop supply diversification strategies similar to nearby higher volume importing countries.

B.2 Supply side Conditions of supply in world trade have been derived from several sources, including Barnett (1985, 1987 and 1989), Jamieson (1986), Long (1986), Koerner (1988), Tex Report (19881, IEA (1989a), Beck and Jolly (1989) and Financial Times (1989). Information from these sources has been incorporated into the following supply assumptions. R Linear supply curves are specified for

US, Australian, Canadian, and South African coal (table 43).

-- -- - - -

42 Coal importers' diversity constraints a

Region

Germany FR France Spain /Portugal Italy United Kingdom Belgium / Holland Denmark Other Europe

Steaming Coking 99 %

Japan 50 55 TaiwanIHong Kong 35 60 Korea, Rep. of 50 55

Other Asia 50 50

East Mediterranean 60 50

South America 60 40

a Maximum percentage of total imports which each xe@on/country can source from a single exporting counhy. Source: ABARE


43 Linear supply curves for major exporters a

Exporter Steaming cod Australia United States South Africa

Coking coal Australia United States Canada

a Specified as: Cost (US$/t fob, 1987 values) = b + c. Q where Q is production in million tonne. Sourcc ABARE

I 0 Inelastic supply (that is, the volume I produced each year does not vary in

response to changes in the world price of coal) is specified for Indonesia, Colombia/Venezuela, China, eastern Soviet Union and Poland/western Soviet Union. In these countries developments in mining and transport infrastructure along with govenunent policy are the over-riding factors determining the level of exports, at least over the projection periods. Projected supplies are given in table 44.

Cl Inelastic supply is also specified in the base case for the protected indigenous

production of importing countries, because government policies insulate these coal industries from world price movements. More elastic linear supply curves are specified for the indigenous production of the United Kingdom and Germany under the accelerated reform scenarios allowing for the fact that reduced protection will make these industries more responsive to world market conditions. The supply functions for the United

Kingdom were based on an analysis of the coal supply function for that country undertaken by Crowley (1989). The slope of

44 Projected exports of 'inelastic' suppliers

Region Item Glombia/Venezuela Steaming

Coking

China

Indonesia

Steaming Coking

Steaming Coking

Eastern Soviet Union Steaming Coking

Poland/Western Soviet Union Steaming Coking

Total Steaming Coking

Sourer: ABARE

~ o a l protection refarm 67

S Shifts in coal industry supply curve as support measures are removed

Australia South Europe 11.30 United States South Europe South Africa South Europe 8.70

the United Kingdom supply function in a free market was estimated using a subset of mines which showed sufficiently low costs to be likely to remain viable without protection. The supply curves for 1992, 1995 and 2000 were then constructed as follows.

With protection (see figure S), domestic supply is inelastic (curve Sp). As assistance is gradually removed and the industry rationalised, the industry becomes smaller and more responsive to world price. With complete elimination of protection, the local industry competes with imported coal on the basisof itscost structure 62). At intermediate stages, the supply curve will take positions such as S1.

Having adopted an estimate for the slope of S2 - that is, of the industry's supply function in the year 2000 under scenario 1 - the slopes for the years 1992 and 1995 were obtained by linear interpolation. Next, to establish the position of each supply function, one possible combination of price and quantity was chosen for each year, using prices from the base simulation and quantities in accordance with the anticipated contraction of the industry identified in the UK country study (see appendix A).

The supply functions for Germany were established using the same procedure, based on the limited data available for the German coal mining industry (for example, Commission of the European

45 Ocean transport costs

Unit cost US$/ t a

From To Australia Germany FR 11.60 United States Germany FR 9.30 South Africa Germany FR 8.90

Australia Japan United States Japan South Africa Japan Canada Japan

a 1987 values. Sourcc: ABARE

Communities 1988). The specification of the supply curves is given in table 14 of the main text.

The German and UK supply curves for scenario 2 (table 17) were obtained by the same procedure, using different figures for the 1992,1995 and 2000 supply levels (see appendix A for these production levels). In the case of coking coal, where only one alternative scenario was simulated, supply curves were needed only for Germany (table 26), because of its dominance of European coking coal production.

B.3 Shipping costs The model allows shipping costs to be determined in two ways. Where freight rates between specific ports of origin and destination are known, these cait be included directly. Otherwise, freight costs are imputed using the following formula provided as part of WOCTES. Shipping cost data provided with the WOCTES software package are presently being used.

C = W(R/30.5 + FP.FC)/L + (1 + B)M(R/30.5 + FS.FC)/24 S.L

where C is cost per tonne in any currency, B is ballast fraction (the fraction of the distance that the ship must return empty), L is load of coal in ship (kt), M is loaded distance (nautical miles), R is the time-charter rate (thousands of currency per month per vessel), S is speed (nautical


46 Actual and simulated seaborne trade: 1987

I From

Steaming coal Australia United States South Africa Other Total

Australia United States South Africa Other Total

Australia United States South Africa Other Total

Europe Europe Europe Europe Europe

North Asia North Asia North Asia North Asia North Asia

Total trade Total trade Total trade Total trade Total trade

Actual Simulated Mt Mt Mt %

Average absolute percentage error 12

Coking coal Australia United States Canada Other Total



Europe Europe Europe Europe Europe

North Asia North Asia North Asia North Asia North Asia

Total trade Total trade Total trade Total trade Tatal trade

Average absolute percentage error 12

miles per hour), W is number of days spent either waiting or in port per round trip, FC is fuel cost (specified currency per barrel), FS is fuel consumption at sea (thousands of barrels per day) and FP is fuel consumption in port (thousands of barrels per day).

WOCTES computes the cost of origin-to-destination movements for a range of ship sizes and chooses the

leastcost ship size consistent with port size at the origin and destination. There is the facility, however, to overwrite such calculations in the light of empirical knowledge.

Representative shipping costs are presented in table 45.

- -


B.4 Validation of model A measure of the accuracy of the trade flows generated was obtained by attempting to replicate actual seaborne trade outcomes for the 1987 calendar year. The results are summarised in table 46. The model could replicate the overall level of world seaborne trade for both steaming and coking coals within 2 per cent, and the proportional breakdown of total trade between Europe and North Asia within 1-5 per cent. Differences between actual and simulated values were larger than this for some trade flows between individual exporters and importers.


- -

Apyendk C Sensitivity of results to model parameters and other factors

A number of supply and demand side assumptions used in the model simulations are inherently uncertain. The importer diversification constraints, the relative positions of the supply curves for the major exporters of coal and future trends in sea transport rates are all key factors. Results of this analysis are presented in sections C1 and C2.

A number of more general economic factors will also affect the ultimate outcome of coal market deregulation and these are discussed in section C3.

C.l Steaming coal In this section, all comparisons are with scenario 2 as reported in the main text. This scenario represents an intermediate path of reform between the full deregulation of scenario 1 and the already anticipated rates of deregulation represented by the base case.

Diversification constraints The sensitivity of the shares of the added European trade that Australia,South Africa and the United States obtain in scenario 2 was assessed by relaxing importer diversification constraints in those European countries expected to import increased quantities of coal. That is, no limit was placed on the proportion of imports that could be sourced from one exporting country.

While the level of world trade overall increases by only around 2.5 Mt, the relative shares of the European market held by Australia and South Africa alter substantially. Annual imports into Europe from Australia fall by up to 13 Mt over the projection period compared to the level of scenario 2, while European imports from South Africa increase similarly. This outcome is due to the comparative advantage South Africa has in supplying

the European market. Australia at the same time gains market share from South Africa in the East Mediterranean and Asian regions (up 6 Mt over scenario 2). Australia's exports in total, however, fall by up to 8 Mt as gains in markets outside of Europe do not compensate for the lower level of coal exports to Europe.

However, gains to Australia in markets other than Europe are limited by the remaining diversification constraints applying elsewhere in the world. If these remaining constraints were removed world trade flows would be determined by production costs and transport cost relativities among the exporters, South Africa would exploit its comparative advantage in supplying Europe while Australia fulfills the bulk of Asiandemand. With diversification constraints removed outside of Europe, world trade increases by an additional 10 Mt, mainly reflected in higher Australian exports to Asian destinations. This result indicates Australia would benefit from the removal of importer diversification constraints.

Increase in real sea freight rates Because of its distance from Europe, Australia could be disadvantaged on a cif Europe basis compared with other suppliers if freight rates increased. The sensitivity of Australia's exports to rising rates was assessed by increasing all freight rates by 10 per cent in 1995 and by 20 per cent in 2000, relative to the reported simulations..

The overall level of world trade is reduced by 5.5 Mt in 2000, mostly accounted for by lower Australian exports compared to the level of scenario 2, Australia loses4.4 Mt in European markets. That is, a 20 per cent increase in sea freight rates results in Australia's export volume falling by 5 per cent. South Africa also loses

C ~ Z protection reform 71

I

I I 1 Mt in European markets. Trade to other I

destinations, including Asia, changes only slightly.

Boycott of South African coal In both the base and alternative simulations, the partial boycotts against South African coal evident during recent years, particularly in some European countries, were accounted for through the general importer diversification constraints. Because the availability of South African coal is a major determinant of the overall level of world trade and traded prices, an extension of boycotts in Europe would be expected to lower world trade.

Extended partial boycotts by particular countries are difficult to include in the model. Instead, full boycotts (that is, no trade with South Africa) in several smaller European markets were used to simulate an extended partial boycott of South African coal throughout Europe. Specifically, a full boycott of South African coal was assumed in France, Belgium, the Netherlands and 'other Europe' (mainly Scandinavian counties) over the entire projection period.

Overall, the extension of the boycott of South African coal reduces world trade by around 5 Mt in 1995 and 2000, but the effect on world prices is small.

South African exports to Europe decline by around 15 Mt in both 1995 and 2000. Australian and US exports to Europe increase, but not sufficiently to fully replace the reduction in South African tonnages.

. This result reflects the higher cost of coals from Australia and the United States. In 2000, for example, exports from Australia and the United States increase by only 7 Mt in total.

The boycotts also result in greater quantities of low-cost South African coal otherwise destined for European markets becoming available in Asia and the East Mediterranean, with a consequent reduction in Australian sales to these markets. Australian exports to North Asia

I fall by nearly4 Mt in 1995, and to the 'other' countries (Meditemanean and other Asian) by 3.3 Mt. Despite gains made in Europe, total Australian sales are reduced by

72

around 1.5 Mt in 1995 by the extension of boycotts on South African coal in Europe. However, by 2000, Australian coal is more competitive with South African coal. (Production costs are expected to rise more rapidly in South Africa than in Australia due to likely real wage increases and the exploitation of higher cost coal reserves.) The loss of North Asian and other markets to South African coal is more than halved, so that the gain to Australia in European markets outweighs the losses elsewhere, and overall Australian exports are increased by around 5 Mt in 2000.

Increase in South African I

supply costs Coal supply conditions in South Africa are likely to have a major influence on the volume of world steaming coal trade and on its price. The slope of the supply curve specified in the model is uncertain because of the likely increases in real wages during the next decade, and the extent to which such increases can be compensated by improved productivity. To assess the sensitivity of model results to the supply assumptions for South Africa, world steaming coal trade was simulated with a 10 per cent increase in South African costs over the entire range of the supply curve.

The volume of world trade decreases by 3 Mt in 2000. South African exports fall by 9 Mt (9 per cent) with losses in all major importing regions but particularIy in Europe. Overall, South Africa loses around 2.5 percentage points in world market share. Clearly, the supply costs of South Africa are important to the overall model solution.

Australia gains export volume, despite the overall fall in world trade. Australia's market share increases by 1.5 percentage points by 2000, and its exports by around 4 per cent.

US supply costs In the model, Australia's share of the growth in the European market also tends to be restricted by the assumed supply costs for the United States. The United States is a large producer of steaming coal,


mining around 680 Mt in 1987, of which only 16 Mt was exported. There is some uncertainty as to whether the United States can sustain large increases in the volumes of steaming coal exports at current cost levels while meeting the ovemding requirement to fill the huge domestic demand. The sensitivity of the model results to US supply costs was assessed by increasing US supply costs by 10 per cent over the entire range of the supply curve.

When this is done, US exports over the projection period are markedly reduced, the losses increasing from 4 Mt in 1992 to 10 Mt in 2000. The losses are mostly in sales to Europe. In percentage terms, the 10 per cent increase in supply costs result in an 8 per cent fall in US exports.

Australia and South Africa benefit from the US losses of trade to Europe, but not to the full extent of the US losses. In consequence, the overall level of world trade falls by 2-3 Mt over the projection period.

Australian supply costs The model results suggest that, without diversification constraints applying in Europe, Australia is a marginal supplier to Europe. However, in the longer term the supply costs of Australian steaming coal could be reduced. Further increases in productivity through continued improvements would allow better utilisation of existing capital.

The benefits to Australia of a 10 per cent reduction in supply costs over the range of its supply curve were estimated. Australia's exports in the year 2000 increase by 17 Mt (14 per cent). Much of this increase is in European markets at the expense of the United States and South Africa. The trade gains are partially due to import demand increases in response to an estimated fall in world cif prices of US$1.20-1.60/t (1987 values) at different times over the projection period. World trade increases by around 6.5 Mt in 2000.

C.2 Coking coal In this section, all comparisons are with the single scenario of policy reform which

Cwl protection reform

involves the complete removal of protectionist coal policies by the year 2000.

Diversification constraints The sensitivity of the shares of the two dominant exporters of coking coal to Europe, Australia and the United States, to importers' diversification constraints was assessed by relaxing the constraints in those European countries expected to increase imports of coking coal as protection is removed. Their removal was shown to have a fairly marked impact on the level of world trade and Australia's share of the European market.

World coking coal trade increases by around 7 Mt (10 per cent) by 2000, as European countries substitute lower-cost US coal for Australian coal and East Mediterranean and South American importers purchase additional Australian coal. In North Asia, where the diversification constraints were not changed from the these assumed in scenario 1, the relative positions of Canada and Australia change only slightly, with Australia exporting around 2 Mt more to this destination at the expense of Canada. Overall, by 2000, Europe imports 6.5 Mt more, the United States exports an additional 12.7 Mt, and Australia 5 Mt less.

This result contrasts with the effect of removing diversification constraints for steaming coal. The contrast reflects the greater difference between the cif price of Australian and US coking coal in Europe, and the smaller number of low-cost suppliers of coking coal, compared with the steaming coal market, and where the differences between cif costs to Europe of the three major exporters is not as great.

Increase in real freight rates The effect of' freight rates on the level of world trade and on the competitiveness of Australia in Europe was assessed by increasing freight rates by 10 per cent in 1995 and by 20 per cent in 2000 relative to the reported simulations. The effect was found to be only small.

World trade falls by between 0.1 Mt and 2.0 Mt in different years, with negligible

73

changes in the level of exports by major Mediterranean destinations by 2 Mt. Small exporters to Europe. This suggests that, gains are made by Australia in Europe (at because of the higher unit value of coking the expense of US exports) and Canadian coals compared to steaming coals, and the coal becomes less competitive in North lower responsiveness of coking coal Asia against Australian coal. demand to changes in the price of coking coal, the level of freight rates is not as C.3 Ofher economic critical in the coking coal trade. factors Increase in US supply costs In the United States, coking coal reserves are more restricted than those of steaming coal; it is mainly produced in the Central Appalachian region of West Virginia. As reserves are depleted, US supply costs could rise. Consequently, the US coking coal supply curve could be higher than assumed in the above analysis.

A 10 per cent increase in US coking coal supply costs was shown to have only a small effect on the overall level of world trade, but a moderate effect on the level of US exports. World trade falls by 1-2 Mt in different years of the projection period, but US exports fall by 2-3 Mt and Australia gains at the expense of the United States. However, most of the fall is in markets other than Europe and North Asia. Thus, the United States could maintain its dominant position in the European market but would be unlikely to do so in more distant markets, closer to Australia.

Australian supply costs As for steaming coal, future improvements in work and management practices in the Australian coalmining industry have the potential to improve productivity in many mines and allow additional utilisation of existing capital investments. Capital intensive open-cut mines are dominant in Queensland, which produces around 70 per cent of Australia's coking coal exports.

The benefits to Australia of a 10 per cent reduction in supply costs were estimated.

1 Annual exports from Australia rise by an average of 5 Mt (around 8 per cent) during the 1 9 9 0 ~ ~ and world trade increases by around 3 Mt. Most of the gains to Australia are made outside of Europe. Exports to North Asia increase by around 3 Mt, and those to South American and East

74

A limitation of the study is the necessarily partial nature of an analytical framework which models only coal trade flows. The effects of reductions in coal protection on total coal demand are represented as movements along demand curves resulting from the reduced price to the consumers. It is beyond the scope of this study to estimate the extent of the secondary effects of reduced coal market protection which could come about through changes in the general level of economic activity and trade. For example, the reduction in protection could be expected to affect the rate of economic growth, levels of taxation and government expenditure, and trade flows in other primary fuels, in electricity and in energy-intensive products. A study of the general equilibrium effects of reduced coal protection on each country and region would be necessary to address these secondary effects.

The Australian Mining Industry Council has commissioned a study of the impact of coal support measures on the German economy through general equilibrium modelling. Results of this analysis should be available early in 1990.

Similarly, it is beyond the scope of this study to attempt to predict the effects on coal supply and demand of major changes in government policies and market structures beyond those directly related to coal industry protection. Fundamental changes in the structure of European energy markets may occur. Fuel substitution or additional electricity imports are possible, particularly in the United Kingdom and the Federal Republic of Germany. The United Kingdom has substantial idle oil-fired electricity capacity which could be used rather than building new coal-fired capacity close to ports. In Germany new combined-cycle gas plants,


fuelled by natural gas from the Soviet mental concerns is likely to vary between Union and the North Sea, could be built to European countries according to political reduce reliance on coal-fired plants; some factors, and future moves by governments

I of Germany's present coal-fired plants are toward reducing power plant emissions able to burn oil and gas. However, future remain uncertain. For instance, a major trends in the prices of oil and gas relative to world conference on global warming held imported coal prices will heavily influence in Amsterdam during November 1989, at fuel choice. Electricity imports could also which 69 countries were represented, failed limit the penetration of imported coal to agree on measures to limit carbon following market liberalisation in Europe. dioxide emissions in the year 2000 to France could export excess nuclear- presentlevels. generated electricity to both the United The above factors not explicitly con- Kingdom and Germany- though it seems sidered add additional uncertainties to the unlikely that French imports would be study results. Taken overall, the general priced low enough to induce the closure of equilibrium effects of removal of assistance large amounts of coal-fired capacity in are likely to stimulate energy demand, either country. including demand for coal. On the other

Environmental concerns in Europe and hand, prospects of some interfuel elsewhere in the world over emissions of substitution and concerns over emission of 'greenhouse' gases may also affect demand 'greenhouse gases' from coal-fired power for coal as a primary energy source, since stations could limit the growth in demand coal produces more carbon dioxide per unit for coal resulting from reform of coal energy output than other hydrocarbon support policies in Europe. fuels. However, the intensity of environ-


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Documents

DaVince Tools Generated data.daff.gov.au/brs/data/warehouse/pe_abarebrs99000191/dp90.1_coal.pdfand the United Kingdom: scenario 1 23 15 Steaming coal: average cif prices in principal