View from City Road: Coal's future still looks black

BRITISH COAL yesterday provided more evidence, if it were needed, that this is indeed a cruel world. Despite Stakhanovite increases in productivity, up a further 13.1 per cent last year, a 5 per cent real reduction in operating costs and an increase in bottom-line profits from pounds 78m to pounds 170m, the company's commercial prospects in a truly competitive environment look increasingly doubtful.

Estimates that the Government could raise more than pounds 500m from the sale of British Coal have been circulating. But once account is taken of the unknown liabilities of future redundancies, subsidence and debt write-offs, it could be that British Coal is in fact worthless.

Neil Clarke, chairman, was not averse to piling on the agony. If the three-way negotiations (or four-way if you count the scarcely invisible hand of government) between British Coal, the English power generators and the regional electricity companies did not produce agreement then the coal industry would have to halve in size.

Some stock market operators saw this as positive for the generators since it suggested that British Coal was becoming increasingly desperate in a buyers' market for coal. While the stock market sagged again, shares in National Power and PowerGen each rose by 3p to 249p and 259p respectively.

This reaction could be a little naive. The generators have indicated that the lower coal price - a gradual fall towards world prices is expected over five years - will be reflected in the fuel cost offered to the regional companies. At the margin there is a dispute between the regional companies and generators over recovering interest costs on coal stocks, underuse of coal importing facilities and delivery costs.

Given the regionals' collective paranoia that Offer, the industry regulator, may accuse them in the future of not purchasing fuel economically, this minor irritant is holding up the whole coal contracting process.

Despite all the hype, the coal contracts will not ultimately alter British Coal's eventual fate or have significant investment implications for electricity shares.

(Photograph omitted)