PowerGen puts the squeeze on RJB Mining

The shadow hanging over RJB Mining lengthened yesterday after PowerGen said it would take just 2 to 3 million tonnes of coal from it next year and then only if the price was cut by a further 15 per cent. Michael Harrison examines the prospects for Britain's biggest coal producer.

The deal PowerGen is negotiating could put three large collieries at risk of closure and see the tonnages it buys from RJB falling by two-thirds from next April. PowerGen is buying about 9 million tonnes this year from RJB under the existing five-year contracts.

Ed Wallis, PowerGen's chairman, said that it had already contracted to buy more than half its coal requirements for next year from UK and foreign producers at internationally competitive prices.

"We are not being awkward or difficult," said Mr Wallis. "We believe we have established a market price. Why should we buy at prices which are 15 per cent higher?"

Mr Wallis added that it did not have to buy any English coal. "It is as simple as that." But if Richard Budge, RJB's chief executive wanted to do a deal with PowerGen it knew the volumes it wanted and the prices it was prepared to pay.

RJB has concluded deals for next year with the other two generators, National Power and Eastern, at prices of around pounds 1.18 a gigajoule compared with world prices of nearer pounds 1. Under the present contracts the price is about pounds 1.45 a gigajoule.

PowerGen also said it planned to continue switching to gas-fired plant as it mothballs ageing coal-fired capacity. Deryk King, its chief executive, said that gas-fired plant could soon account for 40 per cent of its total UK electricity output.

Charles Kernot of Paribas Capital Markets said the outlook did not look good for RJB. "It is not looking very bright. 1998 is going to be a tough year. International coal prices are collapsing because they are largely set in the Pacific Rim and we are also seeing new mines coming on stream in Indonesia which is having a further negative effect on prices."

Mr Wallis also repeated his call on the Government to be allowed to buy a regional electricity company. PowerGen may be ready to move quickly if the Monopolies and Mergers Commission report into PacifiCorp's bid for Energy Group gives the green light to further vertical integration in the industry. The report is due to be delivered to the President of the Board of Trade, Margaret Beckett, today.

The energy market, he said, should be treated like banking or supermarkets, where a handful of large players provided competition. There were a growing number of integrated energy companies now operating including Scottish Power, Energy Group, Scottish Hydro, Centrica and Entergy, the US utility which bought London Electricity and is expanding into gas-fired generation.

"We believe the industry should be allowed to evolve freely and that generators like us should be allowed to expand into distribution and supply. Only then will you see real competition.

Seeboard and Sweb, now owned by US utilities, are both thought to be on the market.

PowerGen's pre-tax profits for the first half of the year fell from pounds 207m to pounds 154m as its market slipped below 20 per cent for the first time owing to increased competition and plant disposals. Stripping out exceptional items, however, profits were 12 per cent up while earnings per share climbed 17 per cent.

Outlook and fuel inquiry, page 25